After all the Holiday Fun,
Here's How to Pay the Piper
By Albert B. Crenshaw
(c) The Washington Post
Sunday, December 24, 1995; Page H01
Tomorrow is Christmas, and across the nation and the area thousands of families will watch in
delight as children tear open their packages to see what Santa has brought them.
But when the happy laughter subsides, many of these families will turn grim-faced when they think
about how to pay the bills.
Whether it's Christmas or Hanukah or Kwanzaa or any of the other holidays Americans enjoy so
much, many people adopt a "go for it" attitude on entertaining, gift-giving and other associated
customs. It's fun at the time, but it can create a financial hangover that can last well into the new
year, in some cases until the holidays start all over again.
"It's a cycle," said Elissa Buie of the Financial Planning Group Inc. in Falls Church.
And the way to break it is through a combination of debt management, saving and self-restraint.
The first step, of course, is dealing with the current cycle, this year's bills. They may have already
started coming in, and if not, rest assured that the mail will be full of them between now and the
end of January.
Planners suggest this approach for dealing with an unexpected -- but not quite bankrupting --
mound of credit card bills:
Figure out what you owe. A surprising number of people don't know, said Kathy Jatras of
Organized Finances Unlimited, a financial planning firm in Arlington. This means the total balance
outstanding -- the amount it would take to pay off your account, not the minimum payment. This is
your target, the amount you have to squeeze out of your budget in 1996 to get yourself out of the
hole.
Divide your balance by 12. That's the minimum amount you will need each month to have it all paid
off by next year. Do you have enough income each month to pay this bill?
If you do, pay more than that minimum so it doesn't take all year to pay it off.
If not, then you have to get a little more drastic. Go over your discretionary spending and see what
can be cut. Discretionary spending is the optional stuff -- meals out, movies, new clothes, cable
TV. Since you can't skip the rent or mortgage, or go without medical care, or not pay your taxes,
this is where your savings will have to come from.
Devise a savings plan. This can mean starting a savings account and making regular deposits, or
hiding it from yourself in your checking account. Whatever works.
This is easy to say but not so easy to do, of course, so the next step is to make sure you don't pay
more interest than you have to while you're working on it. Today's credit card market gives you
some room to maneuver if you are not too deep in the hole already.
Draw up a list of your credit accounts and the interest rates they carry. When you can make
payments beyond the minimum, those with the highest rates should get first priority. "Really pay off
the high one," Jatras said. "Remember the minimum is hardly paying anything except the interest."
You can probably get by in the short run with minimal payments, but letting a credit card balance
ride is very costly in the long run. On an 18 percent card, the interest is 1.5 percent a month, and
typically the minimum is 3 percent, so only half the payment goes toward the actual debt. And
some companies are cutting the minimum you have to pay each month to as low as 2 percent.
Don't be enticed by the lower minimums they offer, said Robert B. McKinley of Ram Research
Group, a Frederick company that follows the industry. "It doesn't take a rocket scientist to realize
it will take many moons" to pay off a balance at this speed and "the interest costs will be
astronomical," he said.
If you have several cards with different rates, ask the issuer of the lowest-rate card about shifting
the balances from the others to that one.
Also, check out the card solicitations that come in the mail. "If you have good credit, you're
consistently getting offers {with low introductory rates for} six months or a year," Buie said. "Now
is the perfect opportunity to switch those cards with low interest rates."
About the cheapest credit for paying off high-interest credit card debt all at once is a home equity
line of credit, which tends to be a point or so over the prime rate -- currently 9 percent -- and
generally are tax deductible. But they "are dangerous for anyone who doesn't have good discipline,
because your home is at stake if you default," Buie said.
If you have a 401(k) retirement savings account at work, look into borrowing from it, Buie
suggested. Rates run around 8 percent, she said, and when you pay back the loan, you are in
effect paying yourself. However, there may be a fee, often about $50, so make sure you'll be
saving at least that much in interest. Check the term as well. Six to 12 months is what you're
looking for. "You don't want to be paying for this Christmas for five years," she said.
Also, Buie said, some plans make you stop contributing while you have a loan outstanding. "Don't
ever do that," she said. The savings and interest are more valuable than the loan.
Your ultimate goal should be not to let this happen to you again, planners said.
A strategy Buie said she has recommended to break the cycle is to "take one year off."
That means going to the adults with whom you usually exchange presents and giving them a
certificate that says, "Do not give me a present this year. Instead, go out and buy yourself
something with the money you would have spent." Then put aside the money you would have spent
on them and use it for next year.
Once you're ahead, keep saving systematically, said Jatras. "The time to think about this is before
you overindulge," she said.
