3 Easy Steps to Avoid End-of-Year Debt
The end of the year is usually the worst time to take on debt for most people. Between getting the kids back to school and a slew of holidays that require spending on parties, family get-together and gifts, it’s easy to overspend and turn to credit to get by.
The problem is that this all usually comes to a head in January when the holidays end and you realize you’ve gotten yourself into a bind with debt. It’s called a debt hangover. It’s the inevitable backlash that comes when you consciously choose to ignore how much debt you’re taking on around special events with the thought that you’ll deal with it once you’re done celebrating.
Still, the end of the year doesn’t have to end in a debt hangover if you start planning ahead and making adjustments now. Here’s what you can do to get your finances ready ahead of time, so you’re not struggling with debt at the beginning of next year.
Step 1: Adjust Your Budget
Expenses at the end of the year can be very different from what you were spending during the summer, depending on your situation. For instance, if you have two kids and live in Washington state, you’ll need to adjust for the costs of your kids being back in school, as well as for the different utility costs that you’ll face once the weather starts to cool off.
So now that kids are back in school, it’s a good time to sit down and review your budget to see what adjustments you need to make. In many cases, expenses will increase, but you may also have places where you can cut expenses – and that’s good, because it helps you get where you need to be for Steps 2 and 3.
Where to look as you review:
- Look at utility expenses. Review your bills from last fall and winter to see how your bills will change and adjust your budget accordingly. Set the monthly expense for each bill high enough that you can afford your most expensive month.
- Add expenses for your kids being in school. This may include meal plan costs, money for extra-curricular activities, or even monthly budget money if you have kids in college that depend on you for all of their expenses.
- Increase your grocery budget for big events. From Halloween treats and party food to hosting big holiday meals for the family and friends, food costs tend to increase at the end of the year, so review your bills from last year and adjust your budget accordingly.
- Review expenses that might be reduce or stopped for the winter. Lawn care services may end or not be needed as much, and if you have a pool and cover it for the winter, pool services can change, too. Childcare can also be reduced since the kids are in school so you would not need care during the day.
Step 2: Set Aside Holiday Money
While you’re working with your budget numbers, allocate money for holiday savings. Determine how much you can set aside every pay period and then make it a goal to save that amount and put it into your holiday savings account. It’s essentially setting an expense for savings so that you can make sure the money gets set aside instead of spending it on something else.
If possible, set up automatic transfers that move the money from your checking to your savings account after you paycheck is deposited. This makes it easier to save because you don’t have to remember move the money over. It also gets it out of your checking account so you don’t confuse your savings with your free cash flow.
Remember, the more you set aside, the less likely you are to be turning to credit cards to get you through December. If necessary, cut back on a few expenses that you can do without for a few months so you can get ahead and avoid the stress of debt problems.
Step 3: Start Shopping Early
You may not be able to do all of your holiday shopping now, since new items may not come out until later in the year and/or you want to hit big sales like Black Friday and Cyber Monday. On the other hand, it’s unlikely that absolutely everything on your list will have sizeable discounts on those two big shopping days. So whatever you can buy now is one less thing you have to buy in November or December.
Spreading out the cost of holiday shopping always makes it easier to avoid turning to credit to get by. A good strategy is to start making your list now and deciding what you can buy in advance. This gives you enough time to watch for sales or discounts from your favorite retailers – and you may not have to wait for holiday sales for that to happen.
Ideally, you’ll have most of your shopping done by the time Black Friday and Cyber Monday roll around. That way, you’re only shopping for items that are really discounted on those days. This will help you save and reduce your stress because you won’t be out fighting crowds on Black Friday to buy everything or running around like mad in December trying to get everything done.
And if you wind up taking on any holiday debt…
Make sure you do it strategically. Put the bulk of your purchases on your credit card with the lowest interest rate so that the debt doesn’t cost as much with interest added if it takes time to pay off. You should only use a different credit card if there’s a good enough reason to do so, such as earning a certain reward for shopping at a specific retailer. But again, those should be special cases.
And make a strategy to pay off any debt you take on as quickly as possible. You can start with another 3 Easy Steps to Reduce Credit Card Debt.