Whether you've just received the bill for last year's holiday excesses or are planning for upcoming festivities, staying out of debt over the holidays is a worthy goal. After all, debt isn't cheap, nor is it desirable. Though you will likely be tempted to "put it on the card," you can resolve to have a debt-free holiday.
How Much Does Debt Really Cost?
According to CreditCards.com, the average interest rate on credit cards has been holding steady at just under 15 percent. If you're committed to paying off your balance in full each month, this isn't a big deal. However, if you don't have the discipline or the funds to do so, your debt could quickly grow.
For example, if you charge $5,000 over the holidays and commit to paying it off in 12 months at a 15 percent interest rate, you will need to pay $452 each month. In this case, by the time you pay off the debt, you will have paid $416 in interest.
What if you can only afford to pay $100 each month on your $5,000 debt? It will take you 79 months (over 6 years) to pay it off – and you will have paid $2,896 in interest.
Planning for a Debt-free Holiday
Debt-free holidays don't happen by accident; they typically require discipline and planning. The earlier you start planning the better because this gives you time to save money and avoid last-minute purchases. Use the following tips to plan a debt-free holiday:
• Set up a holiday savings account. You don't necessarily need to join a Christmas club at your bank, but you should designate a savings account specifically for the holidays. Set up automatic transfers or direct deposit from your paycheck to ensure that the account is funded regularly. Consider your holiday budget and break it down into monthly or weekly deposits. For example, if your budget is $3,000, you'll need to save $250 each month.
• Set a realistic (and frugal) budget. Who says you have to spend excessive amounts on the holidays? If you have traditionally spent $3,000 each year, can you scale back? Is it possible to cut that in half? You may need to spend less per person, eliminate some recipients, make homemade gifts, or hold fewer parties, but you can absolutely scale back.
• Create a recipient list. Create a master list of all family members, friends, neighbors, teachers, and other people you typically give gifts to. Next, go through the list and see who you can eliminate. Many adult family members draw names each year or choose not to exchange gifts. If the adults in your family still exchange gifts, consider approaching them about alternatives. Once your list is pared down, put a dollar figure next to each name and brainstorm gift ideas that fit the budget.
• Buy gifts throughout the year. As the year progresses, revisit this list and add ideas as you think of them. Keep this list with you and buy gifts throughout the year. Update the list so that you know exactly who you've purchased gifts for and what you bought. This allows you to take advantage of sales and put real thought into each item. It will also keep you out of the malls during the busiest shopping time of the year.
• Choose modest gifts for teachers, friends, and neighbors. The saying, "it's the thought that counts" rings true. While it would be nice to splurge on a designer leather cover for your child's favorite teacher's iPad, a $5 gift card to the local coffeehouse would also be appreciated. Baked goods are a thoughtful, inexpensive way to spread holiday cheer to a large group of recipients.
• Hold a holiday swap with friends. Instead of buying expensive new outfits for holiday parties, trade or borrow clothes with your friends. This can be a fun (and cheap) holiday event in its own right. Brew a pot of coffee, encourage everyone to wear their most outrageous holiday sweaters, and have fun exchanging clothes.
• Host fewer holiday parties. If you regularly host holiday parties, you know how quickly they can bust your budget. This year, take a break from being the host. You'll save a ton of money. If you can't resist, consider a holiday brunch instead of a cocktail or dinner party. Not only can you get away with serving a simple meal, you'll avoid the high cost of serving adult beverages. Attending a lot of holiday events can be expensive, too, so limit the number of parties you attend and choose those with minimal costs.
• Ask for help with holiday meals. Serving a holiday dinner with all the trimmings can quickly bust your holiday budget. Even pies can cost over ten dollars each. Your extended family members have their favorite dishes that they'd be more than happy to share, so don't hesitate to ask. You might splurge on a filet mignon roast for the family, but ask your siblings to pitch in by bringing appetizers, side dishes, wine, or dessert.
• Take it easy on the holiday decorations. You likely have plenty already, so don't buy a bunch of new ones. The one exception might be LED lights as they are dramatically more energy-efficient than traditional lights. Put your LED lights on a timer to further reduce your holiday utility bill. If you celebrate Christmas with a live or cut tree each year, consider buying an inexpensive artificial one. The cost will be close to what you'd typically pay, and you'll be able to use it year after year.
• Book holiday travel early. Not only does booking flights and hotels in advance save you money, you can save even more if you travel during off-peak times.
With advance planning and a commitment to cutting costs, you can enjoy a debt-free holiday. Not only will you save money and stay out of debt, you'll likely experience less stress and be better able to enjoy the spirit of the holidays and the companionship of your friends and family members.