Manage Your Christmas Debt

The Christmas tree is ordered and the positioning of the mistletoe planned. The Christmas cards are written, envelopes stamped. You have ordered two bottles of Cristal champagne, a case of Chablis, five dozen cans of beer, a bottle of Remy Martin XO brandy, a case of 1994 vintage port ( you could not afford the 1927 majestic vintage ) and oodles of sparkling water and soft drinks. The turkey, ham, food, and presents are separately itemised on another extensive shopping list. That’s just for Christmas Day.

Yes it is that time of year when we all go mad for about a week, spreading good cheer, partying and spending like there is no tomorrow. The aftermath is the problem.

Which is why you would be better advised to plan your Christmas spending binge BEFORE the actual event.

At this point in your finances, you should know how much is coming in and how much is going out each month. If you do not have a surplus, you are either dipping into savings or increasing your overdraft or loan debt. The latter can be very expensive exceeding your limit can cost you up to 27.9% per annum plus referral fees (€ 4.44 ) and even having your cheques sent back (unpaids—€ 12.70 each )
Credit cards can also be costly as verified a couple of years ago by the then Chief Executive Officer of Barclays Bank plc when he stated he personally would not touch one and a millstone if you have not planned to tackle the debt in the immediate future.

Term loans and car loans are normally in excess of DOUBLE OR TRIPLE the average home loan interest rate and therefore expensive. Short term debt can be the difference between meeting your immediate financial needs and being unable to cope with the weekly financial demands. However, it catches up on us all eventually and something at that point has to give. Prudence will dictate that you do not spend in excess of what you earn, but sometimes that is not practical. Christmas time is one such example. Careful budgetary planning will provide you with the information for you to know what you CAN spend inside your income limits. As long as you are aware of what that shortfall is, if there is one, and your plans to repay the debt, then you have some chance of financial stability.

In an ideal world, our total financial monthly commitments should not exceed 35% of our net monthly income. This includes, mortgage, car loans, term loans, credit union loans and hire purchase or leasing agreements.

As an example, if your total household income is a net € 4,500 per month and your financial commitments ( mortgage, car loan, personal loan, credit card ) is € 1,800 per month, you have € 2,700 every month to pay all your other costs ( food, heat, light, transport and telecoms costs, entertainments, holidays etc ) Christmas spending is usually never budgeted for and the credit card invariably comes to the rescue. It is accessible and you don’t need permission from a bank manager as long as you have not “maxed” your credit card limit. If you choose to repay only the minimum balance every month, it could take you up to 11 years to repay fully. That is also 11 Christmases and where are you going to find the money for those 10 other annual celebrations?

Here’s what to do

1. Work out the cost of
i.    Presents (covering family, friends and bursaries binmen, postmen etc)
ii.   Additional Christmas costs ( cards, decorations, tree/s)
iii.  Food and drink for the festive period (usually twice as expensive as a normal week’s purchases)
iv.  Entertainment (Funderland, cinema, pantomime, zoo etc)

2. Total all these costs you are going to have to pay for them through savings, overdraft, loan or a credit card. The ideal of course is to fund from savings.

3. Have you this saved ? The best saving method for your Christmas costs is to start the previous January a Goose Club or Stamp Saving Scheme and put what you can afford away each month on a regular basis for 11 months standing order or direct debit. Therefore the total amount of your Christmas bill should be divided by 11 to ascertain what that monthly saving amount should be. If you have not saved, you will need to borrow for the coming Christmas but you then should plan to save DOUBLE from next January so as to pay for both this Christmas and the next.

4. Borrowing interest rates from your local credit union or local TESCO finance tend to be the cheapest options when it comes to short term finance   (loans up to 3 years  e.g. € 2000 over 3 years at 7.5% will cost € 62.21 per month) Overdrafts are well over 15%  PLUS you can pay an additional 12% surcharge is you exceed your limit without permission, as explained above. Credit card rates vary from 8.5% to 24% (the latter for certain store cards) and virtually ALL the credit card companies charge over 22% when you withdraw cash on a credit card. However, there are a number of companies who offer 0% interest rate on transferring balances from another credit card company for up to 6 months. You might be even able to save during this period. Email me for details of these.

Here is my Christmas present to you five secrets to a sound financial philosophy and a wealthy life :

Money is Not Boring

The only boring thing about money is not having enough of it. If you never, ever want to have money problems, then set aside a reasonable period of time on a regular basis (I do it once a month) to review your financial position. A money plan both immediate and long term is essential. Remember, too, that investment can be fun. I believe in putting spare cash into things that bring pleasure such as overseas property, fine wine, even rock and roll memorabilia!

Put Your House in Order Before You Begin

You won’t get very far if you have one hand tied behind your back. Before you set off on your quest for profits, pay off any expensive debt and make sure you aren’t wasting money. Depending on your circumstances, protecting your income in the event of being unable to work and protecting your dependents if you die may be your first priorities.

Every Euro Counts

You can turn € 10 a day into € 1,180,253 by the time you are age 60 if you start on your eighteenth birthday ( assuming a growth rate of 8% pa). Yes, if you have money to start with it helps but it is possible to make yourself rich by saving on a regular basis. There are some fantastic deposit rates up to 8%  for the regular saver. Email me for details. Don’t be afraid however to release equity from existing property if you do not have immediate spare cash. This should be for investment purposes mainly and not funding your lifestyle.

Don’t Be Greedy

In the autumn of 1955, a former social worker from New York, Bernard Cornfeld, arrived in Paris with a yen to make money and ended up launching a mutual fund group called Investors Overseas Services which, at its peak, employed 25,000 door to door salesmen. The firm’s winning one line pitch was: ‘Do you sincerely want to be rich? ’and hundreds of thousands of investors piled in. The initial gains were fabulous but, of course, it all ended in tears. If something seems too good to be true if the promoters are trying to pressure you in to investing forget it. Bear in mind that the very wealthy tend to share a single trait: their priority is not to achieve spectacular returns but to preserve and grow their wealth.

Diversify, Diversify, Diversify

I am a firm believer in the old adage: never put all your eggs in one basket. When planning your investment strategy divide your money between different classes of investment (the stock market, the bond market, property and so forth). Within each category of investment you should also be diversified. For example, you shouldn’t put all your money into a single share or even a single market. Bear in mind that the most lucrative, long-term investment is the stock market and whether you invest directly, in a basket of shares (such as a unit trust or managed funds) or through a pension plan it should make up a large part of your wealth. The second most profitable, long-term investment tends to be property so you should have money in this, as well. Remember all markets, including property, are cyclical. Property WILL come back. Only then should you look at alternative investments. Also, while tax savings are important (especially via pension plans) you should never let the tax tail wag the money making dog. Finally, don’t be shy about getting expert help. A good financial adviser is worth his or her weight in gold.

John Lowe, Fellow of the Institute of Bankers, is managing director of The Money Doctor trading as Providence Finance Services Ltd based in Stillorgan Co Dublin He is author of The Money Doctor Finance Annual 2009 ( from Gill & MacMillan)   tel [phone], email [email protected] or web www.moneydoctor.ie – His podcast series “How to get rich this week with The Money Doctor” is available on the above website, iTunes and www.gillmacmillan.ie.