surprised Santa Clause

New Year, No Debt: Your Guide to Recovering from Christmas Spending

Every year, you work hard to give your loved ones a wonderful holiday experience. Whether it’s giving them their dream presents, throwing festive gatherings, or traveling long distances to be together, the costs associated with the holidays can quickly add up, often landing in your lap in the form of bloated credit card bills and depleted savings come January.

Starting the new year with fresh debt is certainly no one’s resolution. But if you find yourself in this situation, know that there are methods you can use to recover from spending, pay down debt, and avoid the same financial aftershock when Christmas rolls around next year.

In this post, we’ll offer practical tips and actionable strategies to help our readers and customers manage holiday debt, pay it off as quickly as possible, and set themselves up for a debt-free holiday in 2024. Keep reading to learn more about how you can recover from Christmas spending!

too many gifts under a Christmas treeA Festive Frenzy: Understanding the Dynamics of Christmas Debt

When you’re in the throes of the holiday season, it can be hard to step back and see how your seasonal increase in spending (even if each item feels insignificant) can snowball into a substantial sum. But with average holiday spending rising over 20% since pre-pandemic levels to nearly $1,000 per person according to the National Retail Association—coupled with record high credit interest rates and fees—it’s easy to see how Christmas debt can quickly grow. In fact, our current national collective credit card balance stands at a record $1.08 trillion.

Even when we are fully aware of the perils of overspending, it can be hard to resist the draw of giving in the holiday season. We do not want to let down our loved ones or miss an opportunity to show our appreciation of them. And our desire to create the perfect holiday experience can not only lead to additional stress, it can also fuel overspending despite our better judgment.

If you’re suffering from post-holiday spending regret, know you aren’t alone. About a third of Americans go into debt each year to pay for holiday expenses.

man reviewing credit car bill after Christmas

Taking Stock After the Holidays: Your Financial Health Check-Up

If you have yourself overwhelmed by holiday debt this time of year, the first step to tackling it is to understand it—how you accumulated it and how it can (and will!) grow without proper measures—as well as how to recalibrate your budget to avoid exacerbating the situation with more debt.

Understanding Your Debt

Credit card debt is what is referred to as “unsecured debt.” Rather than having a piece of real property (like a home or a car) as collateral, if the debt is unpaid, the credit card company or lender is on the hook for the loss. Because of this, unsecured debt tends to have higher interest rates than secured debt like home mortgages and auto loans. While our personal credit cards at Citizens State Bank are locked at a consumer-friendly rate of only 15%, current credit card interest rates at many other financial institutions are tipping the scales at nearly 30%.

But that 30% isn’t a flat fee. Like most loans and investments, credit card interest compounds. As your unpaid balance accrues interest, this interest is added to the principal amount. Subsequently, the interest for the next period is calculated not just on the original debt but also on the accumulated interest. This compounding effect can result in a rapidly growing balance, making it crucial to pay off credit card debt promptly to avoid increasing financial burdens.

How much can credit card debt grow? If you spent $1,000 this Christmas on a 30% interest credit card and only make a $30 minimum payment each month, it will take over 6 years to pay off the balance and the total interest will be $1,176.88—more than the original amount spent!

Understanding Your Spending

In addition to understanding the nature of credit card debt, it’s important to understand your spending tendencies, and how the amount of money you spend compares to the amount of income that you have at your disposal.

Analyzing your spending by scrutinizing bank and credit card statements can help you isolate areas where you are spending too much. Once you have a firm understanding of your current spending habits, you can work to create a budget that sets limits on discretionary spending, reduces certain unnecessary expenses, and finds extra income to put to better use—like paying off debt or creating a rainy-day savings fund.

Tracking your spending and creating a budget is relatively easy when you use your bank or credit card’s online statements and spending analysis tools. However, if you have many accounts, it can be difficult to pull all the spending data together to make sure your budget is on track. Many budgeting apps can pool information from multiple cards and accounts in one place, giving you better oversight into your spending. Furthermore, many of these apps can help you find places to cut spending, send reminders when you are getting off-track, and encourage you when you make good financial choices, helping you stick to your plan.

person making a budget

Strategies for Paying Off Christmas Debt

Understanding and reducing spending is just one component of getting out from under debt, especially if your debt is growing. To save interest costs and get out of debt faster, it’s important to create a plan for how to tackle your balances.

There are several common methods for paying off debt that may help you eliminate yours faster. But before we delve into them, it’s important to acknowledge that any debt payoff plan requires consistency and commitment. To ensure you stay the course, here are a few principles to adhere to:

  • Stay realistic. Getting out of debt may take months or years, and may require some lifestyle changes. Know there isn’t a shortcut to being debt free.  the short-term recovery phase and long-term financial health.
  • Practice mindful spending. Make all purchases—especially larger ones—with care. Before each purchase, consider whether or not it’s essential. Consider adopting the “30-Day Rule” where you wait thirty days for purchases over a certain dollar threshold. Consider taking a few austerity measures, like not eating out or getting takeout or pausing subscription services until your debt is repaid.
  • Don’t ignore your savings. While it’s important to pay down your high-interest balances quickly, if you have no savings for emergency expenses, you may find yourself dependent on credit cards again in the future. Set aside a little bit each paycheck—even if it’s only $20—to start growing an emergency fund.

Now, let’s take a look at a few debt pay-off strategies.

Snowball Method

To follow the Snowball Method, you’ll start by compiling a list of your debts, arranging them from smallest to largest, irrespective of their interest rates. Allocate any available funds to pay off your smallest debts first by making extra payments beyond the required monthly amount. Once the smallest debt is settled, redirect those extra funds to the monthly payments of the next smallest debt. This approach creates a snowball effect, amplifying your debt elimination power with each paid-off debt and reducing your overall monthly payment burden.

The Avalanche Method

Employ the Avalanche Method to prioritize debt elimination based on interest rates rather than size. Channel all surplus funds towards paying off the debt with the highest interest while maintaining regular payments on other balances. Upon clearing the highest-interest debt, redirect the funds that were allocated to its payments toward the debt with the next highest interest, and so on, until all balances are paid off. This method has the benefit of wiping out the debt that costs you the most first, while allowing your debt elimination power to grow quickly with each subsequent balance you pay off.

Debt Consolidation and Balance Transfers

Another option for reducing interest charges is to consolidate your debt into a lower interest loan (such as a home equity loan) or transfer your balances to a credit card with a zero-percent introductory interest rate. When you reduce your interest rate, it may help you tackle your debts faster—or at least keep them from growing. However, it’s important to keep a few things in mind:

  • When taking out a home equity loan or line of credit for debt consolidation, remember that you are putting your home on the line, should you fail to make payments.
  • Credit cards with 0% introductory interest rates often have some of the steepest rates and fees once that introductory period runs out. Be sure to only utilize this option if you are confident you can pay off your debt during this time.

piggy bank dressed as santa

Holiday Savings Plan: Building Your Christmas Budget Throughout the Year

To avoid the same debt pitfalls next holiday season, consider creating a firm budget for your holiday expenditures, saving a little each month to meet your spending cap goal. For instance, if you plan to spend $1,000 next Christmas, setting aside $40 with each biweekly paycheck can help you easily reach that goal—and you may not even miss the money!

The best part of saving for Christmas spending, rather than putting it on credit, is that you can use an interest-bearing savings account, like our Personal Savings Account, receiving interest on your funds rather than paying it to a credit card company. Set up automatic transfers or direct deposits from your paycheck to make the process effortless.

Budget-Friendly Gift-Giving and Celebration Ideas

In addition to saving throughout the year, if you’ve found that you’ve been spending more than fits comfortably into your budget, you’ll also need to consider ways to reduce your purchases. Here are a few simple suggestions:

  • Give DIY Gifts: Handmade gifts and homemade food items can be both personal and cost-effective, especially for gift exchanges with colleagues and acquaintances.
  • Gift Exchange Games: Recommend organizing gift exchanges like Secret Santa with family and friends to reduce the number of gifts needed.
  • Experiences Over Material Gifts: Gift experiences, which can be more memorable and often more affordable.
  • Shop Early: Shopping for gifts throughout the year, especially during sales, can help spread out expenses.
  • Budget Celebrations: Throwing a party? Make it a potluck! Hosting a family gathering? Consider a holiday movie night with popcorn instead of an elaborate get-together.

Holiday Lessons: Charting a Course for Financial Wellness

At Citizen State Bank, we know that holiday debt often arises out of good intentions—showing your friends and family how much you care about them through thoughtful gifting. Unfortunately, when the holidays are over, the outcome of overspending can create burdens in the new year.

Getting out of debt can take time and commitment, but with dedication and strategy, you can tackle those balances and set yourself up for an affordable future holiday season. We can help. Stop by a branch in Naturita, Ouray, Ridgway, Silverton, Telluride or our newest location in Mountain Village today to open a savings account or speak to a lender about our lower-interest debt consolidation options.