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It happens every January like clockwork. The credit card statements come in and all of a sudden you're having buyer regret about how much you spent on gifts over the holidays. There's a better way – a few in fact. Read on for our tips on how to avoid racking up debt this year with a bit of strategic planning.

As sure as December will bring decorations and eggnog, it will also bring debt for many Canadians. While most are planning on scaling back holiday spending this year, many others will still take on debt in December. But with unemployment still high and COVID not going away any time soon (despite promising news about vaccines), it’s more important than ever to make it through the holiday season debt-free.

That’s where we come in. Below we’ve listed several tried and true strategies for avoiding debt this year so that you can celebrate with loved ones without the anxiety of worrying about how you’ll pay off your debt in 2021.

Step 1: Save in Advance

Saving money in advance is the easiest way to avoid going into debt over the holidays. To make saving as painless as possible, list who you are planning to purchase gifts for and assign a dollar value you will spend on each person. Don’t forget to include small gifts like annual tips for service providers, gifts for coworkers, and smaller presents for extended family. If your family tends to celebrate with gatherings, budget extra for food, alcohol, and travel.

Add up those amounts to get a total savings goal and divide that savings goal by the total number of pay periods before the holidays. Start saving money from each pay period, and then you’ll have cash on hand as needed. Personally, I start saving for the holidays on the first payday after Labour Day. As an added bonus, earn a little extra from your savings by putting your money into a high-interest savings account, like the Savings Plus Account offered by EQ Bank. It offers no everyday banking fees and 1.50%* everyday interest rate.

Start saving with EQ Bank

*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

Step 2: Stick to Your Budget

While budgeting and planning ahead for your holiday spending is an excellent way to avoid debt, a budget is only useful if you stick to it. To do that, you’ll need to track your spending. There are plenty of ways to do this, from a super simple strategy of keeping your receipts and tallying up your expenses to importing your transactions to excel or using a budgeting app.

I prefer using a budgeting app because it takes the leg work out of spending tracking. When you sign up for You Need a Budget, you’ll be able to link your bank and automatically import your transactions. Once the import is complete, it takes minutes to categorize your spending, and you’ll be able to instantly see how much you’ve spent on the holidays so far.

Using a budgeting app helps you see at a glance whether you are on track to stay within budget or whether you are overspending on the holidays, which might land you in debt.

Try YNAB Free For 34 Days!

Step 3: Use a Prepaid Debit Card 

Setting a savings goal is all well and good, but if you have a weakness for impulse spending (or blowing your budget for the perfect present), then consider stepping things up a notch by using a prepaid debit card. These cards can be used anywhere that accepts Visa or Mastercard (including online), but they aren’t a credit card. Instead, you can only spend what you have preloaded onto the card. This limitation effectively ends your ability to overspend since, once the money is gone, it’s gone.

A good option is KOHO Visa — a free pre-paid, reloadable card that lets you earn 0.5% cash back on all spending and gives you access to a plethora of financial management tools. Upgrade to KOHO Premium and get 2% cash back on purchases and no foreign transaction charges (a big plus if you’re buying stuff overseas!). For the full details, read our KOHO Premium review.

Get an extra 1% cashback with YOUNGANDTHRIFTY referral code

Step 4: Take Advantage of Cash Back Cards and Money-Making Apps

This strategy is best employed early in the year, but you can still use it now to get a jump start on your holiday spending for 2021. If you’re comfortable doing your daily spending on a credit card, you can use cash back credit cards throughout the year to finance your holiday spending. This strategy has served me well since I switched from a travel rewards credit card to a cash back credit card. Last year, I accumulated $1,300 in cash back rewards, and the money was deposited into my chequing account in November. I used that money to fund my holiday spending, and don’t have to worry about saving in advance or how much I can afford to spend.

To take this strategy even further, you could use a money-making app like Amplii, which lets you link your debit and credit card and automatically accumulates cash back spending throughout the year. You can withdraw your cash back in $15 or larger increments and deposit that money into a savings account to help fund your holiday spending. Read our full Ampli review.

Learn more about Ampli

What to Do If You End Up in Debt

Unfortunately, sometimes even with the best intentions, we end up overspending, especially around the holidays. You might overspend because there’s that one person you always forget to include in your gift budget, airfare ends up being more expensive than anticipated, or you just ran out of cash. Whatever the reason, it is super common to have a credit card bill in January that is significantly higher than you expected. If this happens, what should you do? Here are a few tips:

Make a payment plan

Make a plan to pay off your credit card debt. Ideally, you’ll still have room in your budget from when you were saving for the holidays, so you could use the money you’ve been saving from each paycheque to pay off the balance promptly. You may even want to try the 50/30/20 budget, which means putting 20% of your (after-tax) paycheque towards debt repayment.

Minimize the interest charges

If you’ve run up a balance on your credit card, you’ll want to minimize the interest charges you pay on the balance. Most credit cards have an interest rate around 19.99% (!), so if you overspend this holiday season by $1,000 and spend four months paying it off, you’ll pay $43.77 in interest.

You can eliminate the interest payable on this balance by moving it to a balance transfer credit card, which lets you pay as low as 0% interest for a specific period (usually six months). If you pay off the balance during the term, you won’t pay any interest at all.

An alternative to a balance transfer credit card is a low-interest credit card, which lowers your balance’s interest down to a range of low single to low double digits, depending on the credit card chosen. A low-interest credit card won’t eliminate your interest charges. Still, if you plan to take a little longer to pay off the balance, a low-interest credit card may be a better choice than choosing a balance transfer credit card or leaving the unpaid balance on your regular credit card.

Consolidate debt

If you’ve got a lot of high-interest debt, you could consolidate your debt with a personal loan. This may sound extreme if you’ve never done it, but the interest rates are often much lower for personal loans compared to the typical 19% that credit cards charge. For instance, Loans Canada offers interest rates that start as low as 5.15%, and you can do the entire application online. Another option is Moves Financial — a line of credit made for gig workers.  There are even no credit check loans (but the interest rates tend to be much higher).

Just shop around to find the best interest rate, read the terms and conditions carefully, and above all, avoid payday loans at all cost.

Learn more about Loans Canada

Stick to cash

Until your credit card is back in the black, try to avoid racking up new debt by paying with cash. This will ensure that you stay on budget. Again, a savvy strategy is to use a prepaid reloadable card like KOHO Visa — it’ll not only keep you from overspending but you’ll also earn cash back on your purchases.

Get credit counselling

If you’ve really dug yourself into a debt hole, ask for help! As a non-profit, Consolidated Credit can help review your debt and outline your debt repayment options.

Learn more about Consolidated Credit

The Final Word: Live and Learn

The 2020 holiday season is nearly upon us, and the best time to lay your plans to avoid debt is much earlier in the year. That said, if you’re starting to consider how you’re going to stay out of debt this year, you can still put the strategies in place now. Make a budget, track your spending, and use cash back to help boost your savings. If you end up in debt in January, eliminate your credit card debt as quickly as possible. Then take stock of where you can improve and resolve to make those changes for 2021.

Personal finance is all about establishing habits, and most of them can’t be established overnight. But if you start implementing these strategies now, you’ll be well on your way to a debt-free holiday season, which will put you far ahead of the majority of Canadians.

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