How a Little Budgeting Can Save You from Financial Disaster
Buying presents, flying cross-country to visit relatives, having special dinners and parties – consumers spend more money in the three months before New Year’s than at any other time of the year. In fact, retailers make about half of their annual profit during this time according to the National Retail Merchants’ Association.
Unfortunately, much of the buying is done on credit, which isn’t surprising given that each year banks mail over three billion credit card solicitations to American consumers. It’s also not surprising, then, that many people get so carried away at the holidays they can’t dig themselves out of debt for months or even years.
To help keep your cheer intact before and after the holidays, we’ve compiled a few tips on being generous without inviting financial disaster.
Shopping Tips
If you want to save money, now is the time to make your resolutions, not after the New Year.
- Cut your gift list. The easiest way to reduce how much you spend during the holidays is to exchange gifts with fewer people than you have in the past. Be honest: Aren’t there a few people on your list that you question year after year? Make this the year you put an end to it. You might even talk to those people in advance and agree that to save money and reduce stress, you won’t exchange gifts but will get together to do something you both enjoy, such as taking a stroll around the lake on Christmas afternoon.
- Find alternatives to purchased gifts. Maybe stopping cold turkey on a gift exchange with certain people doesn’t feel right, but you don’t have to go overboard, and you certainly aren’t obligated to buy a gift. Granted, it’s a natural temptation, especially when you’re bombarded by relentless advertising telling you that the expense of a gift is the measure of the feeling behind it. Instead, try being creative with alternatives like homemade treats, a coupon for your services such as babysitting, pre-addressed and stamped envelopes so an older person can easily keep in touch, a family photo, or a tax-deductible contribution to a charity. These thoughtful gifts are sure to be appreciated.
- Make a budget. Once you’ve figured out who you want to buy gifts for, determine your overall budget and have a general idea of how much you can afford to spend on each person. This helps you avoid the temptations and frustrations of last-minute impulse buying.
- Spend within your budget. Having a budget is as useful as melted ice on a hot day unless you don’t stick to it. This takes tremendous discipline, and you may want to enlist help. Shopping with someone who can act as the voice of reason is the best way to keep from overspending.
- Get started early. Good deals are often available before the official holiday shopping season starts on the day after Thanksgiving. Prices are usually lower, you have more time to take advantage of mail order bargains, and you can find some great deals on models that are being phased out toward the end of the year.
- Look for good gifts that are also good buys. Learn about the features and options available on a particular product, especially expensive items such as cameras, video equipment, sporting goods, stereos, and computers. Get specific product numbers before you shop around so you’re not comparing apples to oranges. Read up on different makes and models so you won’t be swayed by the more costly recommendations of zealous – and commission-hungry – salespeople.
- Shop for bargains. Once you’ve decided on a gift, it pays to shop around. Studies have shown prices can vary by 50% or more for identical products, especially audio-video and computer equipment. Also don’t assume that prices are always lower in catalogs or on television shopping channels, no matter what their ads claim.
- Know the store’s return policies before you buy. If what you thought was a perfect gift for Aunt Bertha turns out to be a duplicate or doesn’t fit her or her tastes, you’ll want your aunt to be able to return the item for a refund, credit, or exchange. Because temporary holiday employees may not be fully informed of store policies, ask the clerk to write the refund policy on the receipt if it’s not printed there. You’ll need to hold onto the receipt anyway in case you need to return the gift.
- Avoid buying unnecessary warranties. Resist the pressure to buy extended warranties or service contracts. They often duplicate the product’s existing warranty and rarely are worth the extra cost. In addition, some credit card companies double the length of the warranty on anything purchased with their card, so check with them before making a purchase. Consumer Reports suggests instead of spending money on an extended warranty, you’re better off putting that money into a savings account to pay for any future repairs.
- Keep records of all your purchases. To make sure you stay on track and aren’t surprised by gigantic credit card bills after the New Year, keep all your sales receipts. Receipts also come in handy when monitoring your credit card statements.
When the Bills Come
Once you’ve spent the money and the bills arrive, you can still make your holiday dollars go further by paying your bills as quickly as possible. Credit cards generally require a minimum monthly payment of 2-3% of your current balance. For a $1,000 balance, that’s $25, but if you pay $25 a month at the average interest rate of 18%, you’ll be burdened by this year’s holiday purchases for the next five years and you’ll end up paying hundreds of dollars in interest on that $1,000.
The best way to avoid these charges is to pay whenever possible by cash, check, or debit card, not credit card. If you must use your credit card, the next best thing is to pay off your entire bill when it comes. Granted not everyone has a spare $1,000 lying around after the holidays, but even paying $90 a month instead of $25 will pay off your balance within the year and save you more than $400 in interest.
Another option is transferring your current credit card balance to a lower interest card. You’ll save a bundle if you pay off your $1,000 balance at 6.9% a year rather than 18% per year. Be careful: People who constantly juggle credit cards often get into financial trouble, and too many open and closed accounts may damage your credit rating.
Finally, if the best advice goes unheeded and you get in way over your head, consider contacting a debt or credit counseling agency such as Myvesta.org or National Foundation for Credit Counseling (nfcc.org). A good debt counselor can stop collection calls and help you work out a budget and repayment plan.
