The holiday season is a wonderful time, but paying for it can turn the new year into a financial nightmare.
How do you conquer that post-December debt?
The Institute of Chartered Accountants of Ontario has some
advice...and it doesn't cost a thing.
The first step is to determine exactly how much you owe. "Check
your receipts and overdraft balance and add up the total debt,"
says chartered accountant Kurt Rosentreter, senior financial
adviser with Berkshire Securities in Toronto.
"Don't wait for your bank or credit card statements to arrive
in January because you will have lost a month of repayment
time. Begin planning for the repayment of the debt right after
the holidays to reduce future interest."
The next step is to develop a payment plan.
"A good plan sets a realistic budget for expenses and the
sources of cash to make payments," says Glenn Lott, with Lott
& Company Chartered Accountants in Markham.
Make sure your payment plan is set up to make regular payments
and that you are making a dent in the principal owing, not just
paying interest.
"Many credit cards are set up to pay the interest only, but if
you do that you aren't making any progress in paying off your
debt," says Rosentreter.
"Your payment plan should also be designed to pay off your
debt in a year, not five years. And while you are paying down
your debt, keep your new spending under control."
Consolidating all of your debts into a single source can be a
good idea. "It is much easier to manage one payment, and you
should make sure the rate of interest on that debt is as low as
possible," says Lott. "Typically, a line of credit or term loan
carries a significantly lower rate of interest than most credit
cards."
If you are a homeowner and your mortgage is your
lowest-interest cost debt, it may make sense to refinance it
and pay off your credit card debt, adds Rosentreter. "Whichever
option you choose, the point is to figure out your cheapest
debt and move the other debts into that."
As you pay off your post-holiday debt, be sure to manage your spending in January and for the rest of the year.
"Critically review your spending habits and reduce non-essential spending," says Lott. "Go without your daily special coffee and pack a lunch instead of eating out. Pay your credit card balances off every month and, if you are short of cash, don't use your credit cards."
If you can't resist the temptation to overspend and charge
items, consider destroying your credit cards. "If this isn't
practical, then consider reducing the number of credit cards
you have and lowering their spending limits," advises
Rosentreter.
Of course, the best way to deal with post-holiday season debt
is to avoid it altogether.
"Budgeting and planning is the way to avoid debt in the first
place," says Lott. "Look at your cash resources before you
start shopping and determine the amounts you will spend for
gifts, decorations, entertainment, etc. Then stick to your
budget."
Avoid last-minute holiday shopping. "If you don't give yourself
sufficient time to shop, you tend to spend first and worry
about the bills later," says Rosentreter. "Along with shopping
early and setting a budget, try to use cash or a debit card for
holiday purchases. That way you are working with real money all
the time, not incurring debt."If you need help setting up a
budget and a plan to pay off your post-holiday debt, talk to a
chartered accountant.
"A CA can help analyze your expenses and spending habits," says
Lott. "CAs can also help arrange a line of credit or a term
loan to consolidate your debt."
