Recovering from the Holidays
A New Year with No Debt: How to Rebuild Your Finances After a Difficult 2020
Hello! How are you today? If you’re like most Americans in January, you could be feeling better. Even in the best of new years, more than half of us don’t pay off our holiday purchases when January’s credit card bills come due. We carry a balance. In fact, many Americans don’t pay off their holiday bills until the summertime. Who knows what will happen this year, as the pandemic still rages but hopefully ends soon.
While we don’t have statistics yet for 2020, we do know the average American racked up just over $1,300 in holiday debt in 2019. That means even before the pandemic, we overspent on gifts, travel, food, and drink.
Ever since the Great Recession, our holiday debt has been creeping up. Only five years ago, we were averaging less than $1,000 in holiday debt coming into the new year. As that number grows, it becomes harder and harder to pay it all back.
In fact, here’s the scariest number of them all. Last year, when 28 percent of Americans started their holiday shopping, they still hadn’t paid off their holiday debts from 2019! They had so much holiday debt, they couldn’t get rid of it before the next holiday season! During a pandemic, you can imagine how much more dangerous that would be. While we see light at the end of the tunnel, there’s no telling what will happen to our incomes between now and then. That could still mean furloughs, pay cuts, and layoffs.
2021 Smart Finanical Goals
So we just hit you with a lot of depressing numbers. From here on, it’s all good news. Let’s start with this simple fact: Most Americans don’t get into holiday debt because they’re irresponsible or frivolous. It’s for a far simpler and easily fixable reason: They just didn’t make a plan. Let’s talk about that now.
The truth is, most of us don’t want to overspend during the holidays. We feel peer pressure to do it. A poll by Lending Tree not only found that more than 6 in 10 Americans dread holiday spending, but almost the same amount report being “stressed about their holiday debt” after the fact. If that describes you, then you’re already motivated to spend less in 2021. You just need a plan.
Learn from the pandemic
While it’s still too early to know for sure, preliminary research shows we spent much less for the 2020 holidays than we did in 2019. Some of those savings are obvious. For instance, we all traveled less. But we also bought fewer, simpler, and cheaper gifts. Why? Because we weren’t gathered to open them, so we had to buy them online and ship them to loved ones. And guess what? The sky didn’t fall and disaster didn’t ensue.
So your first 2021 smart finance goal should be: Resist the peer pressure and buy reasonable gifts once again this year. If this pandemic taught us anything over the holidays, it’s that our relationships are priceless, not our gifts.
Not only should we keep buying reasonable, personal gifts next year, we should do it even earlier than we just did. So many retailers pre-empted Black Friday by offering deals well before that unofficial holiday. Well, let’s keep that going.
Everyone knows that the best time to score deals on holiday decorations is in January when stores are selling off their leftover inventory for cheap. Every month is off-season for something, and that’s the time to snag a discount and hide it in a closet for Holiday Season 2020. You can easily scour the Internet to learn which months are historically buyers’ markets. Believe it or not, many of these individual deals will save you more money than buying those same items during the usual Black Friday sales.
How to pay off 2020 holiday debt and save for the 2021 holidays
Now let’s stop talking about buying things and talk about paying for things. Let’s show you how to pay off last year’s holiday debt and set yourself up for a debt-free holiday season at the end of this year. Your options include both do-it-yourself tactics and getting free expert advice. It really depends on your financial situation and your own personality. So let’s get started.
If you have steep and stubborn holiday bills, the first thing you need a debt diagnosis. You don’t go to a doctor, though. Instead, you call a certified credit counselor. These experts work at nonprofit credit counseling agencies. While they’re on the phone with you, a counselor will give you a free debt analysis. They’ll review every dollar you spend and every dollar you earn. From there, they can give you a menu of debt-busting options.
Debt management program
One of the most powerful weapons in a credit counselor’s arsenal is called a Debt Management Program, or DMP for short. It might be able to cut your monthly payments by up to 30 or even 50 percent. How can it do that? Simple. Your credit counselor works directly with your credit card companies. A DMP has several wonderful advantages over trying to get out of debt yourself.
Not only do you save money on interest rates, a DMP also freezes late fees. Even better, you only make one payment a month for all the credit cards that are in the program. You make that payment directly to the credit counseling agency, who pays your creditors on time. No more forgetting to write that check for that one credit card, then getting hit with late fees.
Obviously, there’s much more I could say about DMPs, but your best bet is to read more on your own time and at your own speed. Since I’m biased, I suggest checking out ConsolidatedCredit.org for the simplest plain-English explanation of the pros or cons. Or you can call a nonprofit credit counseling agency and not only receive that free debt analysis, but also ask any questions you have about DMPs or anything else financial.
We just talked about the ways to spend wisely and get out of debt if you didn’t. Let’s talk now about budgeting in advance. Now I know what you’re thinking: Budgets are boring. Who wants to waste time adding up your income and expenses and then figuring out how to best spend it every month? Where’s the fun in that? But budgeting in general has been proven to be the best way to save both money and stress, and an emergency budget is hands down the best way to avoid big problems when the unexpected happens. Let’s go over both now.
Here’s the first rule of personal finance: You can’t save money unless you know how much you’re spending. So if you’ve survived 2020 and want to thrive in 2021, you’ll create a monthly budget. And it’s not as difficult, or even as boring, as you think it is. Why? Because technology can do a lot of the work for you.
While you can certainly go old-school and create a budget by putting pen to paper, it’s so much easier if you use secure online tools that require just a few keystrokes. There are websites, apps, and programs that handle the drudgery of budgeting for you. Many are free, and the ones that charge are only a few bucks. Here’s how they work.
Cutting edge ways to cut expenses
One of the most popular is called Mint, although many banks and credit unions offer similar programs on their websites for their customers. Basically, you just type in your income and expenses, and these programs do the math for you. You can even project your savings if you eat one less takeout dinner, or if you refinance your mortgage. The software does the heavy lifting for you.
If that’s a little too techy for you, there’s a middle step. Websites like Tiller let you download customized spreadsheets that stay on your computer, and you easily personalize. Each program has its pros and cons, but they all work. So it’s really up to what makes you feel the most comfortable.
Now that you understand the value of a regular ol’ budget, let’s take the next step and talk about emergency budgets. What’s an emergency budget? It’s a stripped-down monthly budget. We’re talking about cutting out every expense that isn’t needed for your basic survival. If this pandemic results in you getting laid off or losing your income for more than a little while, you need to know – in advance – how much it will cost you just to survive these difficult times. Without an emergency budget, you’re flying blind.
In an emergency budget, you focus only on the expenses that matter most. First, there are your basic needs: food, water, and shelter.
Second, there are bills you just gotta pay. Mortgage or rent, other loans, utilities, water. Although we’ll talk in a moment about how to delay or reduce some of those.
Then there are support functions that you can’t live without. For example, if your car breaks down, you need to fix it – or you can’t get to work and make enough money to survive. Same thing for childcare.
Cut out ALL luxuries
Once you prioritize the three broad categories we just mentioned, time to cut back to the barest of bones. Since we’re talking about keeping only the necessities, get rid of everything else. That includes pausing or even canceling monthly subscriptions like cable or satellite TV. That’s right – no Netflix. And you’ll scale back your phone plans to the cheapest level available. Ditto with your wifi. If you can get a cheaper rate for a slower connection, you’ll build that into your emergency budget. Every penny counts here.
Before we go any further, let’s clear the air: While emergency budgets aren’t fun, they don’t have to be miserable, either. Just because you’ve cut out your costliest entertainment options doesn’t mean you can’t enjoy yourself. You and your family can enjoy board games and even go outside and hike, bike, or walk. Your local library has both online and socially distant in-person options to keep you both entertained and educated. Bottom line here: Helping your bottom line doesn’t mean living like a monk.
Don’t pay debts, defer them
During the worst of the pandemic, the federal government offered a slew of debt-delaying plans to ease the economic strain on us all. These include rent freezes and deferrals on paying taxes, student loans, and mortgages. Many private industries did the same, and while the federal CARES Act expired on New Year’s Eve, those private lenders are still offering some help.
So if you need to commence your emergency budget, we have some weird advice for you: Don’t pay your debts. At least not before you ask permission to defer or reduce your payments. It sounds odd, but if you call your lenders, they might cut you some big breaks. Why? Because if you go bankrupt, they lose a profitable customer. So they’ll often work with you, temporarily cutting the amount of your payments, deferring them for a short time, or slicing off some of the interest you owe. But you won’t know for sure until you ask.
During a normal economy, experts recommend you save 3-6 months of bills and other budgeted expenses. This allows you to weather a period of unemployment or cut hours at work without relying on credit cards.
Of course, a pandemic is exactly when you’d dip into an emergency fund. But what if you don’t have one? Well, now is the time to start. That’s right, during a pandemic might be the best time for you to start saving for the next emergency.
If you’re one of the fortunate Americans to not suffer a furlough, pay cut, or layoff, then you still have money coming in. And if you’re practicing safe health practices, you aren’t going out and about as much as you once did. With everyone else cutting back right now, this is the perfect time for you to start socking away a few bucks a week so you can build up an emergency fund.
One easy way to do that: If your employer pays you via direct deposit – and 82 percent of Americans get paid that way – then you can ask your company to split your direct deposit. That’s right, most employers will let you send some money to one bank account, and some money to another. So you can shunt some of your paycheck directly into a separate emergency savings account. You won’t even miss the money, because you’ll never see it in your primary account.
How to have a happy new year
If you think the advice you heard today is helpful, but you don’t know how to exactly do everything we discussed, I have good news. You can learn all of it at Consolidated Credit’s website, and it’s all free. As a nonprofit, we offer personal finance advice on every topic we’ve covered today. You can read it online, download booklets, watch videos, and use interactive tools. You can even call us for a free debt analysis from a certified credit counselor. There’s no obligation and no high-pressure sales tactics or anything like that.
So if your new year’s resolution is to spend less and save more, we’ll help you every day. If 2020 wasn’t exactly a banner year for you – and let’s face it, it was terrible for most of us – let’s make 2021 something special together. Thank you so much for listening, and we welcome any questions.