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How the smart money avoids big debt at this time of year

The holiday shopping season is in full swing. In a country where spending is already a national past time, this is the time of year when many people significantly increase their debt and overextend their already overextended finances. Many people will be starting the New Year faced with a pile of credit card bills, wondering where all their money went.

Corrie J. Moore, a financial advisor with Waddell and Reed, Inc., of Silverdale, gave five reasons why people end up in financial dire straits, both during the holidays and throughout the year.

“The first is retail exuberance,” said Moore. “People make impulsive purchases without thinking of the consequences.”

This exuberance usually leads to credit card debt, another factor for people’s money woes. According to Moore, many people carry an average of $10,000 to $15,000 in credit card debt, often on top of mortgages and car loans.

Big splurges any time of year, and procrastination — such as buying Christmas gifts all at once in December, rather than spreading the expense over the whole year — can eat into finances, as well. Finally, Moore pointed out that many self-employed people with cyclical income find themselves in a work slowdown at the end of the year, without a plan to get them through.

“Folks are, by and large, spending money they don’t have,” said Moore. “Unfortunately we live in a society where the question isn’t ‘how much is it?’ but ‘how much is the payment?’”

To combat holiday financial pitfalls, Moore made a few suggestions. Before making gift purchases, ask yourself if you can celebrate without spending money.

“Would mom prefer a store bought gift, or a gift from the heart?” asked Moore.
If you find yourself tempted to make purchases to ease your stress or combat the holiday blues, consider another method to make yourself feel better, such as exercise, a relaxing bath, or talking to a friend or therapist.

“A lot of people just get sad over the holidays and sometimes they try to heal by buying things,” she said.

More generally, she cites an overall change in how we need to look at spending and saving money. In the past, employer pensions and social security were relied on for retirement, and long-term saving and investing weren’t priorities for the average person. Now, individuals need to plan diligently for their own retirement. This means good financial management throughout your life, and that requires a spending plan.

“Planning really is the key,” said Moore. “Knowing what your priorities are and not losing sight of those priorities, even during the holidays.”

Creating a spending plan means you have to understand your spending.

“Some people have no clue what they spend on a monthly basis,” said Moore. She recommended using a net worth statement that outlines assets and expenditures. Consulting this statement regularly can help people keep track of where they are financially and help them stay on their spending plan.

Getting rid of credit card debt is also key. In many cases, this does not mean getting rid of or never, ever using a credit card. Credit cards can be a great way to track spending, said Moore, and many credit cards offer purchase protection plans, which can be an asset when purchasing high-priced items.

But it’s important to be able to pay the credit card off each month, so that your money doesn’t end up going towards paying interest and fees. One of the things that Moore sometimes does with her clients is calculate the interest that they are paying on their credit cards, and then show her clients how many hours they will have to work just to pay off the things they have already bought.

“That can be pretty powerful,” she said.

Next, every household should have an emergency savings fund that can cover three to six months of living expenses. This emergency fund could be a savings account, a home equity line of credit, or even a low-interest, high-limit credit card that’s reserved for emergencies.

A savings and investment plan is vital, and often the easiest way to do save is to automate it. If your employer offers a pre-tax retirement program, with the money coming straight out of your paycheck, contribute to it. If you can automatically transfer money into your savings account, set that up.

Setting savings goals can also make it easier to save. For example, if you set a goal to travel to Hawaii each year, and your plan includes setting aside money each month for the trip, you’ll be more motivated to save that money and less likely to spend it impulsively.

Moore is quick to point out that financial difficulties are not always due to poor choices. Unexpected illness, job loss, and other factors take their financial toll on even the most frugal among us. This is all the more reason to have a plan and a safety net, she said, so that when the unexpected happens you have the resources to handle it.

By and large, being smart with your money is not complicated. The old formula of putting 10 percent in savings, 10 percent in investments, and donating 5 to 10 percent to charity still works, if you apply it diligently.

“It really is a simple equation,” said Moore.

What it comes down to, said Moore, is “when you have a dollar in your hand, you have three choices. You can spend it and it will be gone forever, you can pay something off you’ve already bought, or you can invest it and let it grow for you. You have to make that choice.”.

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