Friday, January 15, 2010

By 

James W. Stone

The first of the year brings great opportunities to study how you spend money and to make plans to improve your game. One opportunity comes when you look at debt from your holiday shopping experience.

In January, you will be getting your credit card statements with a summary of all the purchases you recently made without paying cash. How will you deal with this situation? If you say , "That's fine, it's just what I expected. I have the money to pay the total balance. Now, write the check. Done!" — Well, if that's your reaction, you are in great shape. But, if the credit card statement leaves you wondering how your will pay for it, and how to manage your minimum payment, you need to do something to improve the way you handle shopping, spending, and paying your bills.

I call this an opportunity, because the information available to you right now doesn't present itself so clearly throughout the rest of the year. If you look at only your credit card statements that you receive in December and January, you will be able to identify all the "credit" spending you've done in the process of what I call "Holiday Shopping"

You really want to examine the spending you did with credit purchases because that type of spending gets out of control so easily. Face it, the purchases you made with cash are already settled. There will be no long-lasting anxiety about the cash spending, and no interest charges either.

If you're not paying off your credit card balance each month, look at your statements. How much debt do you have left on your credit cards after you make your January payment? Compare that to the debt you had after your October payment (before the holiday spending). If you find January's balance to be higher than October's balance — It is isn't it? — then this next bit of planning is for you.

Let's say your balance for all credit cards is $1,000 more in January than it was in October. That would show how much of the holiday expenses were absorbed by your credit cards. You haven't been able to pay as you go. And you didn't have a savings account to cover the spending you were going to do during the holidays. Now, not only are you concerned about the increased debt, you're going to pay a 29% interest rate on the new debt, thanks to the recent increase in interest on your credit card accounts.

What do you do?

This quick study of how holiday spending has affected your wallet is only one glimpse at the potential problems you might have in other places in your spending habits. You might be able to learn something here that you can apply to other patterns in your spending. But let's just look at how you can get control over this holiday debt so that it doesn't show up next year.

The solution is simple in its strategy:  Realize there are twelve months in the year. That's twelve months until you get to this place after next year's holiday shopping blitz. Spend the next six months paying off the debt from this year, and the following six months saving money to be able to pay the bill when it comes due this time next year.

In order to pay off the debt in six months, you need to pay $167 every month just on the principle of the debt. Then you need to add about $14.30 to cover the "average" interest (assuming you pay off the debt in six equal payments over six months). So, six payments of $181 will pay off $1,000 of holiday spending in six months. By the end of June, after you have made the six payments, you will have paid for the holiday spending for this recent season.

Then you want to continue your payments of $181 into a savings account (or even just a piggy bank in your closet) for the next six months - from July until next January. That's how you get ahead of the game.

When you are spending for the holidays next year, take the money from your savings (now worth at least $1,086.00) and spend cash.

I know you looked at that monthly sum of $181 and asked, "Where am I going to get that money?" And I know gathering that much money every month is not an easy thing for many people to do. The truth of the matter is that the $1,000 is only $83.33 every month. That's less than half what I have asked you to put into this process. But the goal here is to pay for the past year, and to get ready for next year.

There are probably other places in your personal money management where you can improve, but this example, isolating the holiday spending, makes a big difference in how you feel about managing your money correctly. In one year you will see a benefit that allows you to enjoy the holidays much more that you would with increasing debt. And the following year you can save $85 each month to prepare for the shopping, and use the rest of the $181 you are accustomed to saving each month to help pay down other debt, or just to have for a bigger Emergency Fund.

James W. Stone
(follow me at http://twitter.com/theJamesWStone)
Copyright 2010, James W. Stone, all rights reserved worldwide