How to Avoid a Financial Hangover

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This post is a straight-up copy of this informative and timely post by FINRA with my annotations offset

like this and in italics

because I don’t have festive holiday colors available.

How to Avoid the Holiday Debt Trap

Let’s start here. The BEST way to avoid the debt trap is to stop spending $$ on more things unlikely to be needed by your loved ones. But before you call me Madame Grinch, the SECOND best way to avoid the trap is to plan in advance for the spend by setting money aside a special account.

Thanksgiving came early this year, and media sources have already reported record-breaking holiday spending in the wake of Black Friday and Cyber Monday sales. The holiday shopping season is in full swing. But beware—more time to shop means more time to spend.

Or more time to spend creatively pondering no-cost ways to make your loved ones happy. :)

Let's face it, there's no escaping the aftermath of too much holiday cheer, whether it's a few extra pounds or the dreaded hangover. Binging on gifts and entertaining can leave a lasting pain, too: credit card debt.

A five-year hangover???

"When holiday spirits run high, impulse control can vanish. We gobble up that extra cookie, and we splurge on that extra gift," said Gerri Walsh, FINRA's Senior Vice President for Investor Education. "Especially when paying with plastic, it can be all too easy for many of us to bust through our holiday budgets."

You’ll minimize the hangover if you pay with cash!

This year, consumers report that they will spend an average of $1,007.24 during the holiday season, up 4.1 percent from the $967.13 they said they would spend in 2017, according to the annual survey by the National Retail Federation and Prosper Insights & Analytics.

But there can be real consequences when you buy on a credit card and don't pay it off in a timely manner, or if you divert money set aside for savings or paying your bills on time, and spend on gifts and holiday cheer.

Keep reading for opportunity cost calculation!

Take this example. If you charged that $1,007 to a credit card with a 15 percent annual percentage rate (APR), and you paid just the minimum each month of about $25, it could take you close to five years to pay off those holiday charges, and cost you over $400 in interest alone.

Here is your opportunity cost as promised. If you take that same $1007, and instead exercise your opportunity to invest in a 5 year CD at a current rate of 3.1% with no additional contributions, you’ll EARN $169. If you add the $400 of interest you WON’T be paying, that’s a savings of $569 over this typical scenario.

If you add $1007 to the CD each year, you’ll accumulate $6047 in 5 years.

Luckily, there are ways to plan now to avoid a debt hangover later. Here are five tips to help you exercise restraint this holiday season.

Make a Budget and Check it Twice

Set a budget that won't land you in a financial snowdrift come the New Year. Then try this. At the very top of your holiday shopping list, write the amount you budgeted for spending this year—and see how much less than that amount you can spend. The list should include every person you intend to buy a gift for and the amount you intend to spend on that person. Don't forget other expected costs, such as travel, decorations or food and drink costs if you are hosting a party.

If you know exactly what you want to buy, make sure you note the cost of each item, and scan for any sales or coupons that you can be sure to have handy when shopping. If you do land a gift at a discount, stick to your list and take it as a win. Don't add on additional, unnecessary gifts.

What FINRA said

Track Your Spending

The list is just your starting point. Consider using money management apps to help you stay on budget, or a computer spreadsheet to track holiday expenses. If you prefer it the old-fashioned way, pen and paper will do. Just track everything all in one spot, and deduct it from that number on top of your shopping list.

This is a great bite-sized opportunity to practice expense tracking. See this post for more on that!

If you end up spending more on one person than you planned, you'll have to find other ways to cut back.

Consider Shopping Solo

Are you the type of person who's easily influenced by others? If so, stay away from big spenders during your holiday shopping trips. Sometimes group shopping excursions can lead to budget-busting spending frenzies, sending people deeper into debt than they had planned.

Or shop with an uber-frugal friend under the agreement that you will politely hold each other accountable to your respective budgets.

Reward Yourself With Your Credit Card Rewards

If you plan on charging your purchases, get a handle on which of your credit cards offer the best reward points programs before you hit the stores. That could mean using one card for gift purchases at large department stores, another at some online retailers or another for those holiday food and drink purchases.

Just be careful to stick to your budget. You should view these rewards as a bonus on your holiday purchases, not as a justification to spend more than you originally planned.

Yes…but…this is also hard to track and means more bills to pay during your hangover. If you must use a card, I’d recommend you pick one with a good general bonus award.

Get Smart About Credit Card Offers

While some may look tempting, be sure to read the fine print, advises FINRA's Gerri Walsh. A common feature to look out for is called "deferred interest," Walsh notes. Under this scenario, you might be offered 0 percent interest for a certain period of time. Should you miss a payment or leave any bit of your balance unpaid when the introductory period ends, however, the provider will retroactively apply charges to your entire purchase amount.

That's very different from a standard 0 percent credit card, which only assesses interest on the balance left after the introductory term ends.

If you get a zero percent credit card, pay it off before the introductory term ends, there will be $0 interest assessed!

Happier Holidays

Sticking to a holiday spending budget doesn't mean you are a Grinch, it means you care about setting yourself—and your family—up for a more secure financial future. And that's a gift that will stand the test of time.

If you’re brave enough to broach the topic with family and friends, you are sure to find many will be relieved to give up the gift trade in exchange for hangover-free holidays. At least the financial kind…;) I would love to hear your strategies to avoid financial hangovers.

Frugal Muscle Memory

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If you’ve ever worked out consistently or played a sport with any regularity, you may be familiar with the concept of muscle memory. Wikipedia describes it this way:

 

“When a movement is repeated over time, a long-term muscle memory is created for that task, eventually allowing it to be performed without conscious effort.”

 

Sometimes you don’t notice that you have muscle memory until you return to the activity after an absence. It is then that you notice that even though it is not without effort, your body seems to re-adapt to the activity with relative ease compared to the first time around.

 

Recently, due to a significant life event, I find myself returning to frugal behaviors that I honed on my way to financial independence. I had slowly slipped away from them as expanded resources led to some lifestyle-creep. In reality, of course, I allowed my lifestyle to creep.

 

There was resistance at first. I knew I needed to make some adjustments but I had grown accustomed to a (still frugal by most standards) lifestyle and I wasn’t yet up to the effort required to adapt. When I finally began to make the necessary changes, it ended up being easier than expected...very much like muscle memory. I remembered what it used to feel like and especially how I had made the process fun.

 

I allowed myself to relearn tools and strategies from friends and fellow frugalists. I have delighted in reacquainting myself with the pride of a great deal. I’ve reawakened my old frugal mindset that simply asks questions about needs vs wants and seeks ways to eliminate or delay spending. I’ve reveled in small successes and look forward to more.

 

Just as I have returned to the gym and found it easier than the first time around, the same has been true as I rediscover my frugal nature. Frugal muscle memory feels every bit as real as its physical counterpart and I am mighty grateful to be able to leverage those earlier skills!