Now that the holidays are over, let’s be honest: you’re kinda glad they’re over, aren’t you? You don’t have feel bad about saying that. It doesn’t make you a Grinch. The reality is, for as awesome as the holidays can be, they are also a source of major stress. One primary stressor is money, or a lack thereof. Do I have enough money to do everything, buy everything, and have the most perfect holiday season? For most of us, the answer is a big, fat NO!
And that leads to … Jan-u-ary! *cue the ominous music, please*
The credit card bills are rolling in and piling up. The money is spent and the bills are calling. What can you do after the tree has been recycled, the ornaments carefully packed away, and the reality sinks you spent way more than you had budgeted?
Take heart…help is here!
Here is a four-pronged approach to attack the December debt and jumpstart the New Year’s savings process:
An Ounce of Prevention…
One of the main issues with overspending results from the vast disconnect between when you “buy” something and when you “pay” for it. There’s a reason credit card companies are some of the most successful institutions on the planet. One easy and effective way to curb future spending is to *gasp* pay with cash.
Ya’, I get it. That’s sooo 1970’s. Perhaps. But, you know what? It works. And it’s as simple a strategy as you’ll find. Step one, take your credit cards out of your purse. No reason to tempt fate. Step two, take out your weekly spending “budget” in cash. Final step, commit to spending only the cash you’ve taken out. That means no running to the bank for more money, no spending on the credit card.
I know, what you’re thinking, any idiot could have told you that. And you’re right, as one just did. But, that doesn’t make it any less true. Trust me, this works. You may not be perfect at it, but you’ll do far better on this program than off it.
Plan for Future Spending
The holidays can be a drain financially not only because people get wrapped (haha – see what I did there?) up in the moment, but because they did a poor job of planning for those moments. This is particularly silly because, as far as I can tell, the holidays are held at the same time every year! I could understand this lack of planning stuff if the holidays were suddenly thrust upon us, but they’re not.
Try this strategy: have a budget in place with cash in hand by the time the holidays arrive.
Example: say you want to budget $1,500 for Christmas and you want the money for your annual Black Friday pilgrimage to Kohl’s, etc. It is January. That gives you 10 months to come up with your $1,500. The math is simple: save $150/month for the next 10 months and you’ll have $1,500 in cold hard cash in your hands to spend as you please.
Not only do you have a budget, but you have an easy way of sticking to it: spend cash, not plastic (see above).
Pay Down Those Pesky Credit Cards
Paying down credit card debt requires a well thought out plan. Yes, “requires.”
Assuming you have multiple credit cards, sort them by balance (smallest to highest), not interest rate. I’m sure you’ve heard the advice – pay off your highest interest rates first – but this advice only works on paper. In the real world, using the “snowball” method is far superior.
The snowball method works better as it taps into our internal motivation system; financial benefits just aren’t enough. Intuitively, you probably knew this already. We’re human, we need positive emotional feedback in order for any lasting change to take hold. The snowball method taps into our emotional needs by rewarding us far sooner and more frequently than the highest interest rate method. This is best explained through an example.
Step 1: Sort your credit cards by balance, smallest to highest
Step 2: Pay Extra on the Card with the Lowest Balance
Assume you can pay an extra $100/month on your cards. Pay the minimum balances on all cards, except Card #1 where you’ll make the extra $100/month payment. Now you’re paying $120/month on the Card #1.
Why would you do this?
*You Get Your First “Win” Much Sooner*
You know what feels great? Getting a credit card to a $0 balance. You will feel a sense of accomplishment, your decision to take on this endeavor will be validated. That validation keeps you motivated as you take on Card #2.
Conversely, had you used the highest interest rate method, how long will it have taken you to get that all important first win? We could do the math, but suffice to say it would have taken a LOT longer. In fact, many people never get that first win as they lose motivation and revert to their old, poor spending ways.
Starting with the lowest balance first works. It gets you a win much quicker and reinforces your good behavior. We all could use a few more “atta boys/girls.”
*You Accelerate Your Ability to Get Your Second Win*
Once the first card is paid off, take the amount you were paying on that card ($120/mo.) and add it to the payment of the next card ($50/mo.). You are now paying $170/month on card #2 greatly accelerating your payback time.
Continue to do this each time you pay off a credit card. This produces a “snowball” effect on the amount of future payments. Every time you pay off a card, not only do you free up more money for other cards, but you get that all important emotional reward that comes from seeing your account balance go to zero. A true win-win.
Don’t take my word for it, though. Give it a shot and see how quickly you can get your first win!
Back to the Basics
Stop living, buying, decorating, and giving to impress others. I know, I know – you’re not one of those people. Rarely do we see ourselves in this light, but take a moment to step back and ask yourself – “why am I making this purchase?” If you don’t have a good reason to make the purchase, if it doesn’t fulfill a need in your life or it doesn’t bring you joy, then don’t buy it.
A simple strategy is to avoid temptation altogether and don’t go out shopping for a couple of months. Yes, this includes online shopping, as well. As good as those post-holiday sales appear, ask yourself: “is saving 20% better than saving 100%?”
A Final Word
Nothing will take the place of discipline when it comes to spending. As you know, being disciplined all the time can be difficult. Incorporating the strategies listed above will help provide discipline through structure which greatly enhances your chances of success. And it’s simple: 1) use cash, 2) save monthly for next year’s expenses, 3) pay your lowest balanced credit cards first, and 4) go on a two month spending hiatus.
Simple? Yes. Easy? How ‘bout you answer this question after you’ve tried it for a month or two? Don’t think … do!