At one time or another, we have all overspent during the holidays. Now that the holidays are over, many of us enter the new year with a bit of dread. If you set a holiday budget and you stuck to it, you're probably feeling pretty good. But what if you let the holiday season sweep you up? You might be wincing every time you open your email as you wait for those statements to come in. If you've got a debt hangover from the holidays, we can help.
Don't Avoid the Issue
When you feel you've gotten in over your head, you may be tempted to avoid looking at your statements. However, that will only make the problem worse. You need to face your debt head-on and start taking steps to pay it down.
Open each statement and see how much you owe for your holiday fun. It may be better or worse than you're expecting, but the most important thing is to know the exact number.
Create a Plan
Look at your overall finances and see how much you can put toward your holiday debt each month. Although it might be tight for a few months, you might try to put the max toward your payments to pay it off as soon as possible.
If you don't think you can pay it off in a few months, create a longer-term plan. Decide how much to apply toward debt and how to allocate it. If you used more than one card, you could pay one off entirely and then apply the extra to the next largest debt, and so on until you pay all of your debt.
Find More Income
If you want to pay off your debt sooner, look for ways to earn some extra money. Side jobs can be a great way to earn extra cash. You might also sell some old items you no longer use. If a family member or friend owes you money, now might be a good time to collect that debt.
Consider Refinancing
If some of your holiday debt is on high-interest cards, you might think about refinancing the debt at a lower rate. A personal loan, home equity loan, or a low-interest credit card balance transfer can be good options to lower your interest and reduce the amount you have to pay overall. Reducing the interest rate can also help you pay it off faster, getting you to a better financial position.
Look to the Future
Once you get a plan to repay that holiday debt, consider making some plans to both ensure that you have more holiday funds saved up and to keep your debt at a manageable level going forward.
Although it can seem counterproductive to save money rather than putting all of your extra income toward debt, creating an emergency fund, then saving for the next holiday season will help you avoid getting stuck in a debt-payoff cycle every year. If you get your holiday debt paid off within a few months, then you can continue to save that same amount each month until you have a comfortable emergency fund. Then, start saving for next year's holidays.
Also, assess your overall debt load. If you're carrying a lot of credit card debt month after month, you might want to focus on paying it all down. One standard metric to assess how well you're managing your debt is to look at how much of your available debt you're using. Add up the total amount you owe and divide it into the total of all your credit limits. We recommend that you keep your overall debt usage below 30% of the total. If you owe a combined $3,000 on three cards with a total limit of $4,500, your debt usage is 67%. You'll be in a better financial position if you pay down that debt so you owe $1,350 or less.
Another way to measure the effects of debt on your financial health is your debt-to-income ratio, or DTI. The DTI is a percentage of your monthly income that goes toward your debt. Again, a lower number indicates stronger financial health. You will want your DTI to be less than 35%. Calculate that by adding your minimum monthly payments and dividing it by your monthly income. If you're paying $800 in card payments, $450 on a car loan, $360 in student loans, and $2,000 in rent, you have total debt payments of $3,610. If you make $11,000 per month, your DTI is 33%.
A little time spent now to handle your holiday debt can lead to some long-term improvements in your financial health.
