Give that debt hangover a miss

‘Tis the season to be jolly … and to be careful to avoid a debt hangover in the new year

LET’S GET PRACTICAL

After the tough year we’ve had, the temptation to throw caution to the wind and make this Christmas an extra-special celebration is understandable.

But Christmas can lead to a financial hangover in the best of years. The website finder. com.au estimated earlier this year that 37% of Australians, or more than seven million of us, kicked off 2020 with a Christmas debt hangover. Most of this was racked up on credit cards with their accompanying high interest rates and low minimum repayments, which can see purchases being carried into the never-never.

As we now know, this was not the time to be carrying unnecessary debt. As the pandemic took its toll on the economy, it was a rare household that didn’t take some form of economic hit.

So the focus needs to be on making this Christmas special with a wary eye to any further financial surprises that could be around the corner.

A survey of 577 people by Pureprofile recently found many people already intend to spend less this year. Around 10% said they wouldn’t buy presents at all (almost double last year’s 6%) while only 20% planned to spend more than $500 on gifts – down from 30% last year.

But it works both ways. More respondents also said they didn’t want gifts this year and there was a widespread preference for practical gifts such as money and gift cards over luxuries.

For many of us, being locked down this year has shown us it is the non-financial things we miss most – spending time with friends and family, going to the park or the beach or just chilling at the local cafe – rather than expensive possessions.

BUDGETING TIPS

The other good news is that the federal government has already chipped in its Christmas present in the form of tax cuts. If you haven’t allocated those extra dollars to paying down debt, why not channel them into a special bank account to buy Christmas treats. Are there discretionary expenses that you can give up between now and Christmas to boost your savings?

Impulse buying is the big danger to Christmas budgeting, so prepare early. Work out what you need to buy and look around for discounts. With retailers keen to make up for lost business, competition for your spending will be fierce, so take the time to shop around. Many of us would like to support

local businesses after a tough year, so talk to them in advance so you can budget for what you need.

We’re all guilty of buying frivolous gifts that the recipient neither wants nor needs. So how about agreeing within your family gift circle to buy just one gift (chipping in with other family members to pay for it if appropriate) that will truly be appreciated. Can you defer it until the post-Christmas sales or give them a voucher to buy it during this period?

The same philosophy applies to Christmas expenses such as decorations and food. Treats can make the day special if you can afford them, but why blow the budget on huge volumes of goodies that won’t be eaten?

Make a list and stick to it. Encourage other family members to share the cost of your family meal by bringing items on the list.

With the growth of Afterpay, the temptation is even greater to spend now and worry about paying later. But try to avoid using it for spending that you haven’t budgeted for as those late payment fees can really add up.

HOW TO DEAL WITH DEBT

There’s no doubt many Australians have already gone deeper into debt to get through 2020. And even with disciplined Christmas spending, many will go into the new year with a debt hangover.

But there’s another silver lining to come from Covid-19. Interest rates are at record lows. Finder reports that more than one in three Australians with a home loan (surveyed in October) intend to refinance in the next 12 months. Insights manager Graham Cooke says a borrower with the average $400,000 mortgage at 3.99% could save around $5000 a year by switching to a mortgage with a rate of around 2.15%.

Lenders have also been offering cashback deals and other incentives to entice borrowers to switch.

Consolidating expensive credit card and personal loan debt into your mortgage can also help to get the debt paid off faster (so long as you increase your repayments) and strategies such as switching to a zero interest balance transfer card can also help to get debt under control (see our Best of the Best Awards for the best cards on offer).

A tried-and-true piece of advice is to always pay off your most expensive debt first (most likely a high-interest-rate credit card) before directing extra cash into lower-cost loans such as the mortgage.

And if you are still struggling, talk to your bank or financial provider sooner rather than later. It may have hardship policies or be prepared to restructure your loans so that you can repay them.