Businesses love the holidays! It’s a great time to maximize sales and profits, no doubt. As such, they will stock up, sell you whatever you’re looking for and smile all the way to the bank.
Businesses know people will be less restrained in their spending over the holidays, more than any other time of the year.
It’s possible you are one of the many who have suffered from post-holiday stress and regret caused by over-spending over the holidays in the past. The good news is that just a little information and awareness can prevent this from happening again in the future.
Your success in controlling holiday spending and thus, post-holiday-season financial stress, depends on how well you can control 3 critical factors:
- Your increased rate of spending
- The manner in which you finance that spending
- The heavy financial demands that result from that spending in the subsequent month(s).
Financing Using Credit Cards or Financing
Often people get to the holidays only to find they didn’t save up enough for their spending needs. Moreover, budgeting is an alien concept to many. Combine this with the easy accessibility to credit, especially over the holidays when many lenders lighten their requirements to actually promote overspending it seems, and this combination often means spending can spiral out of control with credit.
Of course, there can also be seemingly “advantageous reasons” to use credit over the holidays adding to this attraction:
- Special “promotional financing” periods where there is “no interest” (but interest will be charged retroactively if the balance isn’t paid off in the promotional period)
- Buying on credit allows you to spend based on money that might be coming in later like bonuses or holiday pay
- Using credit lets you better track your expenditure
- You don’t have to carry a lot of cash around…
Use of credit, however, does carry significant dangers if it is not carefully controlled. Research indicates that spending could increase by up to 35% when using a credit card compared with using cash.
Here are some key principles to help you guard against running into credit card debt trouble.
Develop and Follow a Spending Plan
If your spending is going to exceed your income for the holiday months, consider cutting back in other areas where you might normally spend (such on lunches out or café coffees), to stay within your budget. BUT the only way you can even hope to stay within your budget is if you actually have one.
This includes also tracking all money that is spent – including cash and credit purchases. Unless you are monitoring your spending in both cash and credit, there is a danger that you will be uncertain whether or not you are living within your means.
Calculate and Consider Your Debt to Income Ratio
Do not forget that use of your credit card adds to your indebtedness. In managing your financial affairs, one of the key indicators to watch is your debt-to-income ratio. This is your monthly debt repayment as a percentage of your monthly after-tax income.
In terms of your credit, it raises a red flag when you tinker with too much debt. A ratio of over 20% looks as if your credit usage is becoming unhealthy. Furthermore, if you already have credit card debt that is overdue, you don’t want to add to it.
Use of a credit card is ideally a means of short- term financing. That means you will want to settle any debt incurred using your card within days. Paying the minimum balance will not do that. If you are not confident that you can pay off anything you “spend” on credit in full soon, you wound do yourself a huge favor by not using a credit card.
Should you decide to go ahead and use a card, you need to be prepared for extra costs in interest and penalties associated with extended credit. This adds to your expenses, and you need to be ready to be ready to reduce other regular expense to accommodate making these payments and making them on time. Otherwise, you run the risk of creating ongoing hard-core debt
Credit card debt incurred during the holiday season is usually for consumer spending—paying for your holiday, buying gifts, entertainment, traveling expenses, etc. Thus, it creates what is known as consumer debt. This kind of debt adds to your liabilities but contributes nothing to your assets.
With credit, your net worth is reduced to the extent of consumer debt incurred. Shrinking net worth is not good for your financial health.