Consumers Can Find $1,000 for Holiday Spending


NEW YORK (MainStreet) — With the holiday season less than five months away, most consumers are not prepared and resort to charging their purchases.

In the past, Americans spent an average of $800 on holiday-related expenses, which is more than a week's wages for many workers. Many shoppers neglect planning for them routinely and wind up racking up large credit card bills.

A lack of planning means severe consequences for consumers who are saddled with paying the interest long after the purchases are made, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC), the Washington, DC-based national nonprofit financial counseling organization.

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If a shopper charges $1,000 and makes only the minimum monthly payment of 2% of the balance at an annual percentage rate of 18%, it will take 12 years to pay off the debt. "Think of it this way – the ghost of Christmas past will haunt until 2026," she said. "This generous consumer will have paid a total of $2,353 for the $1,000 worth of goods and services purchased."

Finding bargains during your shopping expedition is not the solution, Cunningham said.

"The savings of buying items on sale is lost if payments are stretched out for months," she said. "Make 2014 the year where you are shopping responsibly by creating a plan now, one that allows you to have not only a stress-free holiday season, but also a debt-free celebration."

Consumers can easily have money available for holiday spending and create a debt free holiday by trimming daily spending. By just saving $1 a day, a consumer can save $150 by December 25.

"Review current spending by looking for leaks," Cunningham said. "Plug those leaks and use the found money for holiday spending."

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Take a second look at your current W-4 and adjust it to accurately reflect the amount of taxes owed. The average income tax refund is about $3,000, but Uncle Sam only returns that money in April, long after the holiday bills should have been paid. If you receive an extra $250 per month, a consumer can save $1,250 by December.

Commit to shaving $10 off of 10 spending categories. While some obligations such as rent, mortgage and car payments are fixed, there are other categories that offer a great deal of flexibility. Consumers can cut back $10 each month on categories such as food, clothing, gas, utilities and entertainment without feeling deprived. By saving just $100 a month, a shopper will have an extra $500 by the end of the year.

Clean out your closets, basement and garage and sell unused items. Since others are also shopping, this is the perfect time of year to sell items that haven't been used in one year. You could easily save another $100.

Consumers should also open a separate holiday savings account to direct all their savings each week and month. A separate account prevents you from mingling the $1,000 holiday money with existing savings or checking accounts that could be spent easily on other items.

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"If you're still paying for holiday spending 2013, consider rethinking your gift giving for this year," she said. "It makes no financial sense to pile new debt on top of old. Kindness and experiences are meaningful substitutes for purchased gifts and are remembered long after the wrapping paper and bows have been discarded."

Consumer spending can easily wind up being bad debt, which is debt that is used for the consumption of goods with little to no long-term value or goods with diminishing value, said Jason Ayala, a private wealth advisor in Phoenix, Ariz. for Ameriprise, the financial services company.

"An example of bad debt is carrying credit card debt that was used to subsidize a standard of living that exceeds your income," he said. "If used appropriately, debt can be a very powerful and beneficial tool – if not it can derail even the best laid financial plans."

Living within your means on a daily basis and using credit cards only in real emergencies is the best option, said Kevin Gallegos, vice president of the Phoenix operations with Freedom Financial Network, a company which helps consumers with debt consolidation, resolution and settlement.

"Paying down credit card debt is one of the best investments you could ever make since the effective rate of return easily can approach 20%," he said. "In addition, having no credit card debt is in itself a financial cushion. It will require strict discipline, belt-tightening and a revision of your goals."

-Written by Ellen Change for MainStreet

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