Debt and the holidays can seem like they go together like gingerbread and royal icing or eggnog and rum. Plenty of people max out credit cards, take out personal loans, and Buy Now, Pay Later financing to celebrate.
According to last year’s figures, 35% of Americans took on debt. The average IOU was $1,549 — a 24% hike from the previous year.
With inflation still higher than usual, budgeting for the holiday season remains a challenge for the average person. But you can do it. To avoid entering the new year with debt, follow these tips.
Set a Spending Limit
Understanding your limit is half the battle. Without knowing this limit, you can easily overspend and dip into credit.
To find this year’s limit, check in with your budget. Once you pay for all the usual bills and expenses, look at the leftovers. This is what you have to spend on the festivities.
Remember that you need to spread this amount across the entire holidays — from travel and gifts to food and more.
If your leftovers are less than you want, return to your budget. Look for unnecessary spending in other areas of your life. If you can put them on hold for the month, you can free up more cash.
Charge What You Can Afford
Contrary to popular belief, you don’t have to give up your credit cards. You can safely rely on the plastic in your wallet without dipping into debt as long as you follow one rule.
Rule #1: Never charge more than you can afford to pay off by the due date.
Are there any exceptions? If you use your credit card as a safety net, you might have to cover an unexpected expense that goes beyond your limits.
In this situation, you should opt to pay as much of your balance at once. At the very least, you should cover the minimum payment to avoid late fines. The financial experts at MoneyKey recommend this rule with a line of credit you use in emergencies, too.
A line of credit works a lot like a credit card, so paying as much of your balance is a good idea.
Leverage Your Credit Perks
The average credit card comes with more perks than your access to your limit. Your account may also provide purchase protections and rewards.
Purchase protections come in many different shapes and sizes:
- You can lean on these protections in case something goes wrong with a purchase. Whether it arrives damaged, or someone steals a package from your porch, your card might reimburse or replace the item.
- You might also have zero liability coverage, which protects you in the event of fraud. If someone uses your account to make unauthorized purchases, you won’t have to pay for them.
As for rewards, you can leverage them to save money on gifts. Most cards come with cashback or discounts on merchandise. To maximize savings, stack them with other loyalty cards when possible.
Don’t Tap Your Emergency Fund
Last but not least, avoid using savings you need for the unexpected on the holidays. You never know if (or when) you’ll drop your phone in water or slip on ice. Your emergency fund can help you cover a replacement phone or afford medical care without dipping into more debt with an installment loan or line of credit.
And there you have it — following these tips can help you avoid piling on debt during the holidays. But don’t stop at the new year. They can help you manage your money long after the celebrations die down.