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Follow 3 money rules to avoid ‘driving yourself into debt' over the holidays, experts say

"You decide how much the holidays will cost."

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Buying gifts could be a welcome distraction from the coronavirus crisis and can help put you in the holiday spirit. But if you aren't careful with how much you spend, it might also put you in debt.

Americans, on average, fell about $1,325 into the red at the end of 2019, according to MagnifyMoney's annual post-holiday debt survey. With financial woes at an all-time high in 2020, however, spending more than you can afford on presents is an even bigger blunder.

"You should aim to spend whatever you can without crippling your bank account and driving yourself into debt," says Travis Tracy, a certified financial planner, enrolled agent and founder of Fortitude Financial Planning. Here are three money rules that could help.

Figure out how much money you can afford to spend

In order to avoid overspending, you need to set a budget. Aim to include everyone you plan to get a gift for and try to stick with the plan. But in order to decide how much to spend on presents and related costs, you need to know how much money you have available after expenses.

Cover essentials like food, housing, and other important living costs first. "Consider your obligations, goals, and true expenses that, while less frequent, tend to bust the budget when they arise," says Jesse Mecham, the chief executive officer and founder of the website, book, and podcast "You Need A Budget." "People will say, 'But I don't know how much we are going to spend.' Well, yes, you do. This is not like a car repair where you don't know how much it will cost.

"You decide how much the holidays will cost."

Don't forget to add nongift expenses like decorations, wrapping paper, and holiday dinners to the list, too. Smaller items like this are often overlooked and can add up quickly.

When you have an idea of the amount you can comfortably spend, make a spreadsheet or a grocery store-style list of the items you intend to buy, which can help curb the temptation to impulse spend on things they don't need.

"I like to tell clients that if they see something they really want, wait for five to seven days to see if they still want it," Tracy says. "Bundling items with stuff you don't need should be avoided. Another thing [to watch out for] is buying the newest version of something that you already have that's not broken. For example, if you have the iPhone 10 or 11, don't go out and buy the iPhone 12."

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Be careful with credit cards

Limit the amount you put on a credit card, experts suggest.

According to MagnifyMoney's 2019 survey, it would take more than five years to pay off $1,325 in credit card debt with monthly minimum payments and the then-average interest rate of 15.1%. Interest rates have grown since then: The average is now about 16.04%.

With a whopping 71% of holiday shoppers planning to do most of their purchasing online this year because of the pandemic, using plastic to pay is almost unavoidable. If you are using a credit card, try to think of it as a debit card and keep a zero balance, experts say.

You should aim to spend whatever you can without crippling your bank account and driving yourself into debt.
Travis Tracy
CFP

"In these difficult economic times, falling back on credit cards is all too easy to do. But we're just putting off the inevitable and the interest on that debt is still high," says Scott Schleicher, a financial planning specialist group manager and senior financial advisor at Personal Capital. "Avoid that trap if possible. Work with creditors to postpone payments or work out a plan to make your monthly cash outlay a bit lower. Those are better options than putting more on your credit card and paying double-digit interest on it."

You could also take advantage of a store card or a prepaid Visa card that has a certain limit, which would force you to stay on budget and not overspend.

If you do find yourself shopping in person, using cash instead of credit could help you spend responsibly: A recent MIT study found consumers are willing to pay 83% more when paying with credit over cash. By making purchases less automatic and more "painful," shoppers might make smarter choices.

Get creative instead of spending what you don't have

Your inclination should be to look for cheaper deals or alternate vendors instead of paying more.

Aside from overspending on credit, another common issue shoppers face is whether or not to tap into their emergency funds to expense costs. The answer is no, Schleicher says.

"An emergency fund, which everyone should have, is what the name implies: for emergencies, things like paying rent and mortgage, and keeping the electricity on. So, using that sort of savings should be reserved for avoiding catastrophes. And while it may feel like keeping the kids happy with nice gifts is worthy of an emergency fund, it's really not."

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Instead, tap into store rewards and promotions to find wiggle room in your budget. And if you have a separate account outside of emergency savings, money that you've deliberately earmarked for less vital expenses, that's OK. "But using an emergency fund to buy holiday gifts is going to feel like a bad decision if you need that money in January to buy groceries," Schleicher says.

Overall, Americans are expected to spend about the same amount this year as they did last year. A November Gallup poll estimates consumers will spend an average of $852 in 2020 versus $846 in 2019.

Even if your spending plans don't change, it still makes sense to plan ahead and to keep track of where your money goes so you can have a better chance of staying out of the red.

"At the end of the season, look at what you actually did spend and compare that to what you would have liked to have spent," says Schleicher. "Then, in January, consider your holiday budget a smaller monthly expense and start budgeting toward it 12 months in advance."

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