10 Ways to Recover from Pandemic Holiday Debt
In normal years, as a nation we tend to rack up more debt around the holidays. It was no different in 2020 as Americans took on an average $1,381 in holiday debt—reaching a 6-year high amid the pandemic.
If you rang in the 2021 new year with more debt than you’d like, now is a great time to tackle it. Here is what you need to know to get those balances under control.
Holiday Debt and Coronavirus
With COVID-19 still raging in the U.S., the holiday season certainly looked different than it normally would. Across the nation, many people still planned on traveling to see family, and many others wisely opted to stay home. According to Hopper’s Holiday Travel Confidence Report, 39% of people still planned on traveling around the holidays, while 21% were staying home—even though they usually wouldn’t.
Shopping in person got trickier. Unable to safely stand in the infamous long Black Friday lines like we usually would, many retailers opted to stay closed on Thanksgiving, bring sales online, and stretch out sales holidays over several days. Meaning, you likely bought the bulk of your gifts online this year (often with shipping charges).
And for the multitudes of people who chose to stay home and social distance with close family, decorating and buying food to prepare at home took center stage if it was financially feasible.
How to Take Charge of Your Holiday Debt in 10 Steps
Whether you were buying gifts online, adding a little more holiday cheer around the homestead with decorations, or opting to take it easy with takeout over the holidays, the new year is the perfect time to reflect, get your finances on track and find out how to start saving more money.
1. Know where you stand
Sit down with your (and your partner’s) financial records and take stock. Look at your last paycheck, credit balances, and bank statements. Make sure you know who and how much you owe and plan to prioritize.
If you haven’t already, this is an excellent time to review all your insurance policies: home, property and life as well as health, dental, and vision coverages. After all, you’re already working on your finances, and the New Year is a great time to start fresh.
2. Tidy up your money mindset
Getting healthier financially is easier when you cultivate a money mindset that supports your goals. Whatever your current situation—lean into it. Write it all down. Talk openly with your family about money matters.
Research shows that the state of your finances can have big effects on your quality of life. If you’ve made mistakes, forgive yourself and move on. If you’re just getting started building credit, be mindful, and remember that every financial move matters.
3. Make a budget
Make a list of your necessary expenses and payments on credit card debt and loans. Log your regular income, unemployment benefits, or any source of income you have. Check your credit card and bank statements for recurring payments and subscriptions. Cancel services you no longer use.
Don’t forget to include making contributions to your emergency fund or savings account. Even if you’re feeling cash-strapped after a difficult year, saving even a few dollars from each paycheck helps improve your personal finances and builds a stronger foundation.
And if you’re struggling to stick to your budget after such a stressful year, know that you’re not alone. Check out common budgeting problems and other creative ways to pay off debt.
4. Stick to cash or debit
Take the credit cards out of your wallet and put them in the back of your drawer. Research has shown that people are more likely to overspend when they use credit cards. But when you have to reach for the cash to make a purchase, you’re likely to think twice.
And, of course, if you use cash, limit yourself to only spending the money you actually have. If you’re shopping online, use your debit card and check your balance often. And if you do use credit cards, pay off the balance every month so you don’t accrue interest charges.
5. Improve your financial literacy
The more you know about finances, the better choices you’ll make. Don’t beat yourself up over your credit card balances or how much is (or isn’t) in your savings account. Commit to improving your financial knowledge and learn how to make savvier financial decisions in the future.
The Consumer Financial Protection Bureau has answers to hundreds of financial questions and guides to help you understand how to plan ahead to reach your financial goals and you can also listen to some of the best finance podcasts.
6. Organize your financial records
The new year is an ideal time to set up the systems that will help keep you on track. Make paper or computer folders where you can put monthly statements for all of your accounts. Use an app or paper log to track expenses. This step alone can help you quickly understand where your money’s going.
Make cuts where necessary and redirect those funds to paying down debt balances or saving using the debt snowball method. Ask your tax preparer if they offer any free resources for documenting and recording expenses.
7. Automate your payments
Juggling many bills can be stressful. You also risk missing payments, which can hurt your credit score and lead to added fees. Calendaring or automating payments for your credit cards, student loans, and any recurring bills is one of the best ways to get your finances in order and stop living paycheck to paycheck.
If you’re worried about canceling automatic payments, or creditors making unauthorized withdrawals, read about your rights. And if your financial planning includes having a retirement account, like an IRA, automating contributions to the account minimizes the temptation to skip them.
8. Consolidate your debt
If you have balances on high-interest credit cards or if you’re juggling lots of bills, consider consolidating your debt with a personal loan. Depending on your income and credit profile, you could get a lower interest rate that would help you save money over your repayment period.
You might also be able to lower your monthly payment to add some breathing room in your personal finances. Remember that consolidating credit card debt only helps your finances if you avoid making new purchases on those cards.
9. Take stock and look ahead
Last year was a whirlwind. You likely faced some unexpected challenges, both financial and in your personal life. While last year’s financial plans may have understandably gone out the window, you can use this time to reflect and prioritize in 2021.
For example, if you’re one of the millions of people still looking for work, or if you’ve decided not to return to the workforce full-time, take some time to decide how going from a dual-income to a single-income household will work for your family. On the other hand, if you’d like to find a job (or switch careers) this year, make an action plan for seeking out new opportunities.
COVID-19 will be with us a little while longer, but hope is in sight. Set your plans in motion now to set yourself up for a fresh start in the new year.
10. Plan ahead for next year’s holiday season
It may feel a long way off right now, but you can start saving now for next year’s celebrations. Take a look at how much you spent this holiday season (during the months of November and December). Consider ways you could have saved, then project the amount you’ll spend next year. Divide that number by 12 and add that dollar amount to your monthly budget.
Create a separate holiday savings account or use a bank that lets you divide your bank account into subaccounts. By the end of next year, you will have saved up a nice sum and less likely to rely on credit cards once the holiday season rolls around.
The Bottom Line
Don’t let holiday debt get you down. Be determined and continue to incorporate financial self-care habits that improve your situation. Making just a few small changes can help you know how to get your finances in order and set the stage for a more relaxed start to the new year.
If you owe holiday bills, consider checking your rate and personal loan eligibility through LendingClub and start taking control today.