How to Pay Off Holiday Debt (And Avoid It Next Year)
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My favorite part of the holiday season is buying gifts for loved ones. I am our family’s chief present buyer, and I take my job seriously.
Since our kids were born, I’ve spent considerable time picking the perfect Christmas gifts for everyone. From the latest tech gadgets to an adventure to New York City, I never fail to surprise my family Christmas morning.
While the presents I gave brought joy to my kids’ faces, the credit card bills that showed up in January were less than enjoyable. In recent years, I’ve learned how to buy thoughtful gifts still while sticking to our Christmas budget.
I’m not alone in spending too much during the holidays. According to a 2019 Credit Karma holiday spending survey, 27% of Americans expected to incur holiday debt. Of those people, 42% expected to take on at least $500 of debt.
As a husband and parent of four teenagers, I want to spoil my family with gifts to show how much I care for them, but it’s too easy to overspend, no matter what budget I set.
A Simple but Effective Process
If you’re like me and you took on debt during the holiday season, there are steps you can take to dig yourself out. Debt can hang around and ruin many of your plans and your finances if you let it. Here are some steps you can take to pay off your holiday debt and get back on track financially.
Step 1: Formulate a Plan
You want to start tackling your debt the way you would most other obstacles in life: Come up with a solid game plan. First, you want a clear picture of where you stand, so find your credit card or bank statements. Add up all of your holiday purchases, from gifts to food to greeting cards, to determine how much debt you accumulated.
Once you’ve taken stock of your debt, you can create a realistic plan to pay it off. Decide which debts to pay off first. It’s good to look at your credit cards’ interest rates if you used more than one card to pay for holiday purchases. One method you can use to pay off your holiday debt is the debt avalanche method, where you pay off credit cards with the highest interest rates first. Another option is the debt snowball method, which involves prioritizing your debts from smallest to largest.
Both are effective methods you can use to get out of debt.
Step 2: Reduce Your Spending
If you’re serious about quickly paying down your holiday debt, you’ll need to find extra money to put on your credit card balances. Cutting unnecessary spending can help create this surplus to pay off debt. This can be as simple as cutting down on eating out for a few months. You can also use a service like Trim to go through your accounts to find unused subscriptions, services, or lower bills on your behalf.
You may also need to make sacrifices to get where you need to be financially. It’s not always easy to give up what you love, but sometimes that’s what’s required to eliminate your holiday debt.
Step 3: Earn More Money
Cutting your spending may not be enough. You may need to find additional sources for income to finish paying off holiday debt.
If available, you could work some overtime hours at your current job. Another option is to pick up a part-time job or start a side hustle in your spare time to earn extra money. If you receive bonuses from your job or are expecting a tax return, those funds can go towards paying off debt, too.
There are plenty of ways you can find or earn extra money to apply to your holiday debts.
Step 4: Get a Balance Transfer Credit Card
Another way to avoid mounting interest charges is to transfer your existing credit card balance to a balance transfer credit card. They offer introductory 0% APR on balance transfers for extended periods, sometimes as long as 18 to 21 months.
When researching balance transfer credit cards, look for balance transfer fees. While there’s no interest during the introductory period, many cards charge a 3-5% fee based on the amount you transfer to the new card.
If you go this route, make sure that you pay off the entire balance transfer before the introductory rate expires and you don’t use the card for any additional purchases.
How to Avoid It Next Year, Too
Holiday debt may seem like a part of life, but this doesn’t have to be the case. With a little research and advance planning, you can be prepared financially when the holidays come around again. Here are four action steps to take to avoid financial mistakes next holiday season.
Step 1: Plan Ahead
It’s amazing how much planning ahead can help your holiday spending. Years ago, my wife and I created a Christmas present budget, and this simple step revolutionized our holiday spending.
We made a list of everyone we buy presents for and the amount we spend on them. The list includes kids, parents, siblings, cousins, teachers, and anyone else who might warrant a gift. We divide that by 11 and set aside that amount every month to make sure we have enough to cover all of our holiday spending by the time we need it.
To create your holiday budget, look back at who you bought presents for this past year and how much you spent. Ask yourself how much you might need to increase your budget or decrease the number of gifts you buy. Do all of those people even need gifts? Use all of this information to create a realistic budget. Set spending limits for each person on your list. Don’t forget to factor in other expenses around the holidays, too.
To figure out how much you’ll need to save each month, add up how much money you’ll need to cover all of your holiday expenses and then divide it by the number of months left in the year. For instance, if you’re putting together your budget in June, you’ll divide your total by six.
To make sure you don’t touch your holiday money, set up a separate bank account for your budgeted funds. You could also pull cash from your bank account every month and use the envelope method. Find whatever works for you, so you don’t touch the money for anything other than paying off holiday spending. After the holiday season comes and goes, you’ll be glad that you took the time to plan ahead.
Step 2: Shop Year-Round
Deals can be found all year, not just on Black Friday, Cyber Monday, and during the holiday season. Keep a running list of gift ideas for your loved ones. When you come across a good deal, buy it and save that item for Christmas. Make sure to account for it in your holiday budget later on.
Additionally, there are specific times of the year you should buy certain items. If one of your kids wants a new bike, you’ll find the best deals at the end of summer when new bike models come out. Depending on what items are on your list, you may save money on Christmas by shopping before the holiday shopping season.
Step 3: Get Rid of Existing Debt
Debt can put a damper on any type of financial planning. If you have existing debt, work towards paying it off before the holidays come around again. If not, you may be more inclined to add more debt from holiday spending. According to a 2019 CreditCards.com holiday debt poll, 51% of people with existing credit card debt think the holidays are a valid reason to add more debt. For people without any credit card debt, that number drops to just 26%.
Similar to paying off holiday debt, work through the steps above to pay off all of your other debt too. If you have any balances on your credit cards or have any loans, work hard to pay them off quickly. Make it a point to start the holiday shopping season with as little debt as possible.
Step 4: Give DIY Gifts
If you’re blessed with the crafting gene, consider making presents for your loved ones. This may not work for everyone on your list, but many people would appreciate receiving handmade gifts. Spend time on Pinterest or Instagram for inspiration and to find original and creative DIY ideas.
Even if you aren’t amazing with a glue gun or an expert painter, there are plenty of crafty ideas that don’t require specialized skills or tons of experience to make. Plus, handmade gifts create a more personal gift experience. Show your loved ones how much you care by creating a gift that you know they will love.
You Don’t Have to Overspend During the Holidays
It’s easy to get caught up in overspending during the holidays. I know I’ve fallen into that trap before. I love my family and want them to have whatever they desire. It’s hard to say no, especially when you find something on sale. It’s also hard to stay within your budget if you’re not actively tracking your holiday spending.
The reality is that spending less during the holidays is better than going into debt. The holidays are more than just presents. It’s also a time for family and friends, spending time together, and enjoying memorable experiences. If you have to cut back on how much you spend on presents, your loved ones will understand.
The holidays can be a stressful time, especially when you’re worried about going into debt just to buy someone a gift. If you have holiday debt, work towards dumping it as quickly as possible and create a plan moving forward to save for the holidays. Planning does take work, but it’s worth it to avoid the stress that comes with overspending.