It’s officially three months until Christmas, and I want to make sure you avoid ending up like Santa Clause in Ernest Saves Christmas. In the movie, Ernest gives Santa Clause a ride in his taxi, but Santa has no money. In the giving spirit, Ernest lets Santa ride for free. You won’t be so lucky. It’s highly unlikely any credit card company will feel the Christmas spirit and let you off the hook. You’re much more likely to encounter Ebenezer Scrooge than an Ernest Worrell.
With three months to go I’m officially warning you to start saving so you don’t have to go into debt during the holidays. Christmas can be tough, and it’s easy to get a credit card and charge all those gifts with the expectation that you will just pay them off later. But I want to change your frame of mind about paying for Christmas. Unless you just have the cash on hand (and most of us don’t) then you are going to be making monthly payments on your Christmas gifts whether you make those payments before Christmas or after, so why not start making the payments now? By making the payments now rather than after Christmas, it actually costs you less money in the long run.
Let’s break it down. We’re going to assume for our purposes here that you will spend $1,000 for Christmas. Some of you may think that’s a crazy amount to spend on Christmas. And some of you may spend much more. Your mileage may vary. But it’s a nice round number to do some math. Even if your number varies quite a bit from $1,000, the principles you learn here will be the same.
If you save $333 each month for the next three months, you’ll have $1,000 to spend for Christmas. You’ll pay no interest, meaning you will spend $1,000 and get exactly $1,000 worth of gifts. Not only that, once Christmas comes and goes, you’ll have no financial obligations moving forward. You can do whatever you want with your money in January!
Now let’s assume you don’t save any money, and you put everything on a credit card. Here’s the thing about credit cards: you still have to save the money whether you use a credit card or not, but it actually costs you money to save after the fact.
We are going to use this cool calculator here for our calculation on how much money it will cost us to use the credit card.
If you pay $333 in January, February and March, you’ll be “saving” the same amount you would save if you start saving today. But using the calculator and an 18% interest rate, it would actually take you until April to pay off your credit card. And it would cost you $31.09 in interest. Now, $31.09 may not seem like a lot of money, but why not use that money on yourself rather than paying a credit card company?
Let’s break this down a few other ways. Sometimes we have the best intentions to save but life happens. Let’s assume that you want to spend $1,000 on Christmas but over the next three months you are only able to save $500 and have to put $500 on a credit card. If we are able to make $333 payments in January and February, we’ll have that debt paid off in two months (and we won’t even have to pay the full $333 in February to do it. And by cutting our credit card amount in half ($1,000 to $500), we’ve cut our interest payment by more than half. Under this scenario you’d only pay $10.12 in interest.
So what’s the takeaway from this scenario? Maybe it’s too late for you to save the full amount for Christmas. But saving even some of the money now, even if you can’t save it all, can make a huge difference in the amount of interest you pay in the long run.
Now let’s analyze a worst-case scenario. Let’s assume you don’t save any money and put $1,000 worth of Christmas gifts on a credit card. For our purposes we’ll assume an 18% interest rate and a minimum payment of interest plus 1% of the balance. If you make only the minimum payment each month, you’ll only have to pay $15. But it will take you almost four years to pay off the full amount, and you’ll pay an extra $198.36 in interest.
But it’s not just about the interest. That debt will stay with you like a chain around your neck (just ask Jacob Marley). The psychological effect of that debt can be crippling.
And let’s be honest. If you are going into debt for Christmas and making only minimum payments on your credit card, you probably have other debt as well, and the debt and interest payments can multiply fast until you have no control over it.
If there’s anything to learn from this exercise, it’s to start thinking about Christmas in September! You can start listening to Christmas songs now if that’s helpful. And even if you can’t save everything you need by December, saving something is better than nothing.
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