Avoid Debt During the Holidays
Business people usually cash in on the holiday seasons to maximize their sales and profits. It will be high season for them. They will stock up, price up, and smile all the way to the bank. They know that people will be less restrained in their suspending than at any other time. It possible that you may be among the many who have suffered post-holiday season financial stress and want to make sure it does not happen again. Your success in avoid debt during the holidays will be determined by how well you control three critical factors: your increased rate of spending, the manner in which you finance that spending, and the heavy financial demands that follow in the subsequent months.
Financing Using Plastic
With holidays like Christmas or the New Year seeming to come round too quickly, people often find they have not saved up enough for their celebrations. Moreover, budgeting is an alien concept during this time and spending can spiral out of control. To cover the inevitable shortfall in resources, the credit card is an obvious attraction. There are advantages to using the card to finance your expenditure:
i) It gives you free access to about a month’s credit.
ii) It gives you the temporary ability to spend beyond your current means.
iii) It allows you to track your expenditure.
iv) You do not have to carry lots of cash around with you.
A credit card, however, does carry with it 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. To avoid extra debt during the holidays, here are some key principles to help you guard against running into credit card debt trouble.
If your spending is going to exceed your income for holidays, consider cutting the intended budget to stay within your income. I am assuming you have drawn up your spending plan for that period. That’s where a credit card comes to the rescue. Though not readily apparent, the use of your credit card can create distortions in the management of your finances. 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. It would therefore be unwise to begin using a credit card if you are not in control of your finances. This means using a spending plan and sticking to it to avoid debt during the holidays.
Debt to Income Ratio
Do not forget that use of your credit card adds to your indebtness. 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. It raises a red flag when you tinker with too much debt. A ratio of over 20% is becoming unhealthy. If you already have credit card debt that is overdue, do you best not to ad additional debt during the holidays.
Use of a credit card is ideally a means of short- term financing. That means settling any debt incurred using your card within days. Paying the minimum balance will not do. To avoid holiday debt, if you are not confident that you can pay it off in full, you would do yourself a 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 reduce other regular expense to accommodate this. Otherwise, you run the risk of creating ongoing hard-core debt.
Debt incurred during the festive season is usually for consumer spending- paying for your holiday, buying gifts, entertainment, traveling expenses, etc and creates what is known as consumer debt. This kind of debt adds to your liabilities, but contributes nothing to your assets. Your net worth is reduced to the extent of consumer debt incurred. Shrinking net worth is not good for your financial health. So do have yourself a happy holiday, but as you go about it, finance it in a way that gives you the comfort that you won’t be debt-laden the following months. Avoiding debt during the holidays is better for your long-term financial heath.