Holiday debt hangover doesn’t have to happen

FARGO – Festive meals, travel and gifts make the holidays merry and bright.

But failing to plan for holiday spending can leave people with a debt hangover in the new year.

It’s a common issue financial professionals see in January, says Josh Huffman, program manager of the financial resource center at The Village Family Service Center here.

Huffman admits he’s guilty of avoiding debt conversations during the holidays, too.

“We don’t want to stress about it while we’re trying to have a good holiday season. People don’t plan for it … and they find themselves in trouble, whether it’s putting it all on credit cards or whether it’s falling behind on other monthly expenses to make the holidays work for them,” he says. “We see it as a big issue.”

November and December are quiet months for financial advisers and counselors, but in January, appointments pick up as people realize they overspent and racked up debt, Huffman says.

But don’t worry – most holiday debt can be paid off in two to three months as long as people are proactive.

Huffman and Edward Jones financial adviser Sarah Nikle share their top tips for reducing holiday debt and avoiding it next year.

Budget

The first step to tackling holiday debt – or any debt – is creating a budget.

Huffman calls it the “holy grail” of managing finances.

“Nobody enjoys talking about budgeting or doing it, it’s not glamorous, but it’s crucial,” Huffman says. “You have to know where your money is going.”

A budget is expenses (such as rent/mortgage, food, etc.) versus income.

Huffman recommends tracking spending for 30 days. Usually, people are surprised by the results.

“It’s shocking, but it’s also one of the best ways to hold yourself accountable,” Huffman says. “It really sucks the fun out of spending when you’re detailing it all and logging it and realize later, I’m going to have to look at this and write it down and know how much I’m spending.”

Once people see where money is being spent, they can learn how to save more and pay off debt.

Pay highest interest rate credit cards first

Shorter-term holiday debt needs to be resolved relatively quickly, Nikle says, especially if the credit cards are high-interest.

“Oftentimes short-term debt is going to be on a credit card, which more times than not is going to carry a much, much higher interest rate than auto or home or other interest rates out there,” she says.

Don’t hesitate

Typically, people don’t see a financial counselor until their debt is high, Huffman says,

It’s common for people to wait to seek guidance until they have $20,000 to $50,000 of debt.

“It’s things like the holidays that happen over a couple of years and they supplement their income with credit cards to keep up their lifestyle,” Huffman says.

People who commit to paying off high amounts of debt typically do it in three to five years while short-term debt, like holiday debt, can be resolved in two to three months.  

Use credit cards responsibly

Credit cards are easy to swipe, and debts add up quickly.

If credit card debt is staying the same or rising, it’s not under control and something needs to change, Huffman says.

One strategy Nikle uses with her clients is to set a credit card limit that’s manageable and could be paid off in full each month.

For instance, if a credit card’s limit is $1,000, you should be able to pay off $1,000 each month without a problem.

If the credit card limit isn’t manageable, call the company to lower it, Nikle says.

If you don’t have access to extra money, you can’t spend it.

But credit cards can be a good thing, too, when they’re used responsibly.

“They’re going to help you build your credit scores and some companies offer really great rewards for travel, but it can be a slippery slope,” Nikle says. “But if you can’t pay it off every month, the interest is going to far outweigh the benefits.”

Avoid holiday debt next year

Budgeting is the best way to avoid a debt hangover next year, Huffman says.

Creating a budget allows people to consider their monthly expense, but also annual expenses like car and home maintenance, travel and gifts.

He suggests opening a special savings account for annual expenses to contribute to monthly rather than charging purchases to a credit card at the last minute.

To decide how much to contribute to an annual expenses savings account, look at the amount spent in those categories in 2014.

For example, if you spent $1,500 on travel and gifts, set aside $125 a month to avoid debt.

Buying gifts gradually throughout the year is an option, too.

E Seek help to build a solid foundation.

Anytime a person has a steady stream of income, it’s smart to seek financial guidance, Nikle says, even if you don’t have financial problems.

“It is a lot easier to get a solid foundation built, especially during younger years, than it is to recover, dig out of someplace,” she says.

Bottom line: Plan

Planning for extra expenses is vital to avoiding holiday debt.

“We don’t do that all the time, I’m guilty of it as well,” Huffman says. “If we don’t plan, that’s when we find ourselves in that mess.”

And pay off holiday debt as soon as possible.

“No one should take on so much holiday debt that it would take them more than three months to pay off,” Nikle says.

In the beginning of the year, hold back on spending to achieve those goals, and more importantly, be thriftier when buying gifts and holiday travel.

“Live within your means,” Nikle says. “Get ahead of it before it becomes an issue.”

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