Recovering from the Holidays: A New Year with No Debt

Good Afternoon and welcome to Consolidated Credit’s monthly webinar for January 2023.  The title of our webinar is recovering from the holidays, a new year with no debt.

For a couple of years, our holidays were dampened by a pandemic. Then came inflation. Still, I think we all managed to value family and friends this past holiday season, right? But now comes January, a traditional month of reckoning. It’s always a stressful month, because that’s when the December credit card statements start arriving. Unfortunately, many don’t pay off their holiday bills until the summertime. Some don’t even pay them off when the holidays roll around again! Today, we’re going to show you how NOT to do that.

Here’s the sad truth about the happiest time of the year: Most of us spend more than we have. In fact, last year, 4 in 10 Americans spent so much during the holidays, they needed multiple months to pay it all off. And that’s bad because…

…most of us put holiday spending on credit cards. Since the average interest rate is over 19 percent, that means for every $100 you charge, you pay $19 in interest. That’s money you’re just handing to your credit card company. And you’re doing it each and every month.

OK, here’s the last scary stat I’ll hit you with, and it’s really troubling: When nearly 3 in 10 Americans start their holiday shopping each year, they still haven’t paid off their holiday debts from the year before! If they’re paying just the average credit card interest rate, they’re losing hundreds and even thousands of dollars every year!

OK, after all those terrible statistics, it’s all good news from now on. Let’s start with this simple fact: Most Americans don’t get into holiday debt because they’re irresponsible or frivolous. They go into debt for an easily fixable reason: They just didn’t make a plan. Let’s talk about that now, because making a plan isn’t hard to do.

Here’s the first rule of personal finance: You can’t save money if you don’t know how much you’re spending. If you financially survived the pandemic without a monthly budget, you definitely need one now. That’s because spending is sure to increase now that we’re almost back to normal. Best of all, creating a budget isn’t 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.

One of the most popular is called Mint, which is free. Others, like YNAB, You Need a Budget, charge a few bucks a month because they offer more options. Either way, 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. Also, many banks and credit unions offer similar programs on their websites for their customers, which are easy to use because you’re already familiar with those websites. Each of these options has its pros and cons, but they all work. So, it’s really up to you. Whatever 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 saving — specifically, emergency funds. If you get laid off or lose your income for more than a little while and don’t have one, you’re leaving yourself financially vulnerable with a high risk of taking on debt.

But who has money just lying around to start an emergency fund? One easy way to start one is to let someone else do it for you. 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. You can put some of your paycheck directly into a separate emergency savings account and you won’t even miss the money because you’ll never see it in your primary account.

Experts recommend you save enough money to cover 3-6 months of bills and other budgeted expenses. This allows you to weather a period of unemployment or cut hours at work ideally without relying on credit cards. To get started, you’ll need to create an emergency budget. This a stripped-down monthly budget that cuts out every expense that isn’t needed for your basic survival—these are your survival expenses. You need to know how much it will cost you just to survive during times of financial hardship. Otherwise, you’re flying blind and don’t know how much to save in order to get through rough patches.

Ideally though, you’ll want to save enough to cover other ongoing payments you have like credit cards, student loans, or insurance premiums. Missing payments of this sort could do some serious damage to your credit score, which would harm your financial health in the long run.

With an emergency fund, you focus on the expenses that matter most. First, there are your basic needs: food, water, and shelter like mortgage or rent and food.  Second, there are bills you just gotta pay – we’ll talk about how to delay or reduce some of those in a moment – but these are the support functions that make it possible for you to work and maintain your quality of life. This includes things like utilities, gas and transportation costs, childcare, cell phone or internet service.

You can’t go to work if you don’t have a way to get there. Maybe you’re looking for a job but need internet access to submit applications or a babysitter so that you can leave for interviews. These costs aren’t directly related to survival, but they’re still extremely important.

Once you prioritize the expenses we just mentioned, you can create an emergency budget that’s 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, build that into your emergency budget. Every penny counts.

Before we go any further, let’s clear the air: While emergency budgets don’t leave much money for fun purchases, they don’t have to be miserable, either. Just because you’ve cut out your unnecessary entertainment spending 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 have to mean living like a monk.

You’re probably wondering why we’ve spent so much time with this emergency stuff. Well, when you’re trying to go into the new year with a better financial plan, thinking about the worst that 2023 could throw at you will keep you prepared for anything. It’s also true that taking control of your finances can make paying off holiday debt much less daunting. In fact, let’s talk about that right now.

If you were one of those 28 percent of Americans who don’t pay off their holiday debt before the new holiday season rolls around, you need to break that cycle. But getting out of debt is much harder than getting into it. Depending on much you owe and how far behind you are on payments, you may be able to do pay it off on your own or you could benefit from professional help. Here are a few options you can try to get rid of your holiday debt.

If you’ve had your credit cards for a long time (we’re talking years) and you’ve made your payments mostly on time, then you can actually ask for a break. You can call the phone number on the back of your card and request a slightly lower interest rate. There’s no guarantee you’ll get it, but credit cards are so competitive right now, they often don’t want to lose a good customer over a fraction of a percent. And you can easily move your due date to avoid late fees.

This might also work for other companies you’re a customer of, like utilities, your cell phone company, or your internet company. Heads up that they’re not just going to do you any favors. You’ll likely need a good reason why you’re asking for special treatment.

A certain kind of credit card can actually help you get out of debt instead of deeper into it. It’s called a balance transfer card. These cards offer you a low interest rate, and in many cases, no interest rate at all. With one of these cards, more of your money goes to paying down your balances instead of lining the pockets of your credit card issuer. Sound too good to be true? They’re not, but there are some drawbacks you need to watch out for.

All balance transfer cards have an expiration date, usually at the end of 18 months – but sometimes for only six months. If you use that time to pay off your balance, you come out way ahead. Unfortunately, research has shown that most Americans who get a balance transfer card don’t pay off their entire balance. Guess what happens then? The interest rate jumps – sometimes to a higher rate than you had on your original cards! So to really take advantage of balance transfer cards, you need to be disciplined and stick to a deadline.

A debt consolidation loan is simply a personal loan you use to pay off all your credit card bills with steep interest rates. The concept is the same as a balance transfer card: You’re paying off the high interest rates with a lower one. In this case, you might be able to get a personal loan of between 36 and 60 months from your bank or credit union at 6 percent, then use the money to pay off your credit cards that are charging you 20 percent. Then you simply make one monthly payment on the personal loan. Usually, you get out of debt faster AND make a smaller monthly payment, which is the definition of a win-win.

But there is, of course, a catch. If you get a debt consolidation loan, you’re looking at 3-5 years to pay it all off. And that’s if you can even get a loan. If you have too much debt, it’s a classic Catch 22. You need the loan to pay off debts, but you have so much debt, no bank or credit union will give you the loan!

If you have steep and stubborn holiday bills, that’s a symptom of a bigger problem. So, 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.

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 and penalties. 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. The biggest benefit is that they cut high interest rates down to between zero to 10% in most cases, and people save up to 50% off the total payments they would have made if they paid the debts on their own.  No more forgetting to write that check for that one credit card, then getting hit with huge 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. I’m biased, but 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.

Now we touched on a lot of topics today, and I know you might have questions about one or even all of them. We’re here to help, so give us a call anytime. We can explain the details on each of these tactics and share other tips we didn’t have time to get to. I just want to leave you with one last thought: You don’t have to end 2022 the way you started it. You can be on the path to financial freedom before the holidays roll around again. And you have professionals willing to help you. So with that, have a very happy new year!  Thank you for attending today’s presentation, may the rest of your day be the best of your day, take care now.