Don’t go into next Christmas with unpaid bills from 2020
Ho, ho, hold on a minute – did we all really spend that much over the holidays?
A recent survey suggests we probably did. In the lead up to the last holiday season, PwC Canada found that Canadian consumers were expecting to shell out, on average, $1,563 each. A Manulife Bank survey stripped even more cheer out of the post-Christmas financial outlook by pointing out that six in 10 spenders didn’t have a budget or were likely to overspend.
And it’s as bad for mental health as it is for bank balances, the survey adds. A quarter of Canadians said the resulting debt causes lingering stress.
How do you lighten the burden on your mind and finances alike? We asked JR Shaw School of Business instructor and certified financial planner Tannya McBride (Bachelor of Applied Finance ’07) about dealing with the lump of coal that is holiday debt, and how to handle the job of refilling Santa’s sleigh next December.
Add up your expenses
“The first step in repaying your debt is becoming aware of how much you actually accumulated,” says McBride. “Sometimes we don’t notice because we spent a little bit in cash, a little on this credit card, a little on that credit card.”
“There are gifts, but then we have the dinners and the events."
Presents, she points out, are just part of the total. PwC Canada found that giving accounted for just 41% of total expected holiday spending.
“There are gifts, but then we have the dinners and the events and if you have kids, oh my gosh, you have to take them to all this Christmas-y stuff,” says McBride. “It adds up.”
Tackle the worst bill first, and fast
“I recommend to start by paying whatever [debt has] the highest interest rate,” says McBride. “And pay as much as you can.”
She makes her case with calculations. Say that average $1,563 debt is sitting on a credit card with 19% interest and that you pay only the minimum $25 per month.
Crunch the numbers
Not sure about how much you’ll end up paying in the long run? McBride recommends using an online calculator to illustrate your options.
Just input your balance, interest rate, and timeframe or expected monthly payment and the program will point the way to being debt free by next Christmas.
“That would take you 293 months to pay back. That’s 24 years. And in that time, the interest that you’re paying is $5,749."
“That would take you 293 months to pay back. That’s 24 years."
The reason for the ballooning balance is twofold. First, of that $25, only 25 cents goes toward the principle; the rest services interest. Second, interest compounds. That 19% is applied not just to the original debt but to the interest accrued each month as well.
Boost your payments to $50 and the pay period drops to 44 months – or just three more Christmases. Try for a year instead at $144 per month instead, McBride advises, which will keep the interest to a total of $165.
Consolidate your debt
If what you owe is spread across several credit cards, consider rolling them into a single debt. One way is a consolidation loan, says McBride. A financial institution will pay off your cards and restructure the debt with fixed monthly payments at a lower rate of interest. “You know exactly how many months it will take you to pay it down,” says McBride.
Just know that your credit cards will be cancelled as a result.
If you don’t have a line of credit with a lower interest rate, another option is a new credit card, says McBride. Some offer low introductory rates, perhaps even 0%, for three to six months.
“That can save you quite a bit of money in interest. Keep repaying as much as you can.”
Involve the family
Dealing with debt can offer teachable moments, says McBride. Just as the holiday season brought the family together, so can its grim aftermath. “It’s financially literacy. Even involve your kids. It’s a matter of having open communication. Conversations are important.”
"It’s a matter of having open communication."
As you come to terms with what you spent, review the impact with your family, and work together on creating a payment plan. After that, McBride recommends asking tough questions: How much did we really need? What can we do without for next year? Let that be the basis of your budget and start saving accordingly.
Then, next year, after making your list and checking it twice, leave the credit cards at home. “Using cash is always best,” says McBride. “But to do that you must have planned for it.”