The Gift of Financial Freedom—How to Avoid Holiday Debt

When you’re a kid, the holidays are a magical time. You have time off from school. You go to fun family gatherings and watch holiday movies (and yes, Die Hard counts). And of course, you open lots of gifts.

When you’re an adult, the holidays can still be magical, but you also get stuck with the bill. It turns out that you can put a price tag on magic. At least when it comes in the form of gifts, special meals, decorations, and all those other holiday expenses. For 37% of Americans, holiday bills turn into debt that needs to be paid back in the new year, according to research by Achieve.

Starting the year with holiday debt doesn’t exactly feel great. After all that excitement and happiness, the next few weeks could feel like coming back to a tougher reality.

Don’t worry—you have options to pay off holiday debt. With a good game plan, you could get everything paid back faster than you expect. Let’s look at how to deal with holiday debt, how to avoid it in the future, and when to consider a debt relief program.

How to Set Up Your Holiday Budget

A holiday budget is the most important tool to avoid starting a new year with debt. Make a budget early in the year, so that you have time to save the money you need. Here are a few smart steps for your holiday budget.

1. Plan your holiday activities

Talk to your family and decide what you want to do during the holidays. Whether you’ll spend the holidays at home, visiting relatives, or going on vacation, it’s good to know in advance.

Once you know what you’re doing for the holidays, come up with your best estimate for how much your plans will cost. Include all the activities you can think of, such as:

• Flights

• Hotel

• Car rental

• Going out to eat

• Any special activities.

2. Decide how much to spend on gifts

In addition to activities, gifts are another big holiday expense. There are a couple of ways to come up with a gift budget. You could make a gift list, then set a spending limit for each person on the list. For example, maybe you decide to spend $300 on gifts for your child, $200 for your significant other, and so on.

Or you could decide on a total gift budget, meaning the amount you’ll spend on everyone’s gifts combined. This method isn’t as much work, at least as you plan your budget. You just need to make the amount work for all the gifts you need when the holidays roll around.

3. Make your holiday budget 

At this point, you know what you want to do over the holidays, approximately how much it will cost, and how much you’ll spend on gifts. Now you can put it all together and make a budget. Add any other expenses that come to mind, such as donations and entertainment.

You may want to use a budgeting app to help you stay on top of your budget, spending, and savings goals.

4. Save money for the holidays

Starting as early in the year as possible, set aside money from each paycheck for your holiday savings. Send your money to a separate savings account if that’s easier. Some savings accounts also let you set up sub-accounts for specific goals.

Do the math on how much you need to save to meet your holiday budget needs. If you expect to spend $2,000 over the holidays and you start saving eight months before the holidays, you need to save $250 per month. Assuming you’re paid twice a month, that’s $125 from each paycheck.

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Staying on Budget During the Holidays

With a budget, you’ll be in a great position to stay out of holiday debt. Here’s how to save money and stick to that budget.

Shop sales

Sales happen year-round. You could take advantage of these discount opportunities if you keep an eye out for things you’d like to give, even if it’s not the holiday shopping season yet.

Maybe your brother would like new barbecue tools. Those often go on sale in May. Maybe your child would like a new backpack. You’ll have plenty of choices in July and August. If a cozy new pair of gloves would make your boss happy, start looking on Black Friday.

Track your holiday spending against your budget

Record all your holiday expenses throughout the year, including gifts, travel bookings, and anything else holiday-related. Check whether you’re staying within your budget.

Adjust your budget

You might need to adjust the budgeted amounts for each category once you start spending. You’re in control of your spending plan, so you can move things around. 

If you regularly or significantly exceed your budget, you might want to slow down on spending, and figure out how to lower expenses. One way to lower expenses is to buy for fewer people. Lots of families enjoy drawing names, for instance, so that each person only has to buy one gift.

Take Inventory of Your Holiday Debt

If you have some bills left over after the holidays, start by making a complete debt inventory. Include all the holiday spending that you need to pay back, from credit cards and store cards to buy now, pay later plans. With a clear picture of your debt, you can figure out the best repayment plan.

A spreadsheet is a good way to organize your debts with all the related information. Open your spreadsheet app of choice, such as Google Sheets or Excel. Add each holiday debt to your spreadsheet with the following information:

• Account name/nickname (Target card, Klarna plan, etc.)

• Current balance

• Interest rate

• Minimum payment

• Payment due date.

You can usually find all this information in your online account for each credit card or financing plan.

By the way, some payment plans and credit cards offer a lower, promotional interest rate. The low rate lasts for a limited time, such as six to 12 months. And with some of these plans, you need to pay off your entire balance within the promotional period. Otherwise, you’re charged interest—going back to when you made the purchase.

If you have any debt with a promotional interest rate, make a note of how long that rate lasts. Also, see how much you need to pay monthly to pay off the balance before the promotional period ends. This is often more than the minimum payment amount. Prioritize paying off the balance in time to avoid costly interest charges.

Strategies to Manage Holiday Debt

If you have holiday debt, there are lots of strategies that can help you pay it off. The key is finding the strategies that work for you and your financial situation.

Select a debt repayment method

If you have more than one debt, consider one of these popular pay-off methods:

• Debt snowball: Put all your extra money on the debt with the smallest outstanding balance, and make minimum payments on the other debts. Once you’ve paid off that smallest balance, prioritize the debt with the next-smallest balance, and so on. You pay off debts quickly with the debt snowball method, which is good for motivation. If you’d like to trim down some debt as quickly as possible, the debt snowball could be a great fit.

• Debt avalanche: Put all your extra money on the debt with the highest interest rate, and make minimum payments on the other debts. Once you’ve paid it off, prioritize the debt with the next-highest interest rate, and so on. Since you’re deciding which debt to pay off first based on interest rates, you save money on interest charges with the debt avalanche. If you want to save as much as possible on interest, you may find that a debt avalanche is the right approach.

• Debt snowflake: Look for opportunities to make small savings, or earn extra cash and put it toward your debt. For example, you could cancel a streaming service, work odd jobs, or sell things you find around the house. These “snowflakes” may not be much alone, but they add up over time and could help you knock out your debt sooner. If you’re a master at finding ways to save money, or you’ve got plenty of side-hustle options, you might love the debt snowflake method.

• Debt consolidation: Get a loan to pay off your debts. Then you only need to pay your debt consolidation loan going forward. Debt consolidation simplifies the debt repayment process, and it could also save you money if the loan has a lower interest rate than your holiday debt.

If you’re thinking of debt consolidation, a home equity line of credit (HELOC) is a popular choice for homeowners. HELOCs are worth considering if you’ve paid down your mortgage and built up home equity. Home equity is the difference between what you owe on your mortgage and the value of your home.

A HELOC could have a lower interest rate than your holiday debt, especially if you’re dealing with credit card debt. Before you decide, find what HELOC monthly payments would be for the amount you need. You’re borrowing against your home when you get a HELOC, so it’s important to make sure you can afford the payments. If you fail to repay the HELOC, you could lose your home.

The methods above work when you can make your monthly debt payments. For overwhelming amounts of debt, you may want to look into debt settlement.

Lower your expenses

Try to reduce non-essential expenses. Every bit counts. Maybe instead of paying for multiple streaming services, you cancel all but one for the time-being.

You can still have fun—just select cheaper ways, like having a movie night at home instead of going out. 

Select a debt repayment tool to help you

There are many free and low-cost debt repayment apps to track your outstanding balances, select a repayment strategy, and manage your debt payments.

Look for ways to make extra money

Consider getting a second job or an as-needed side hustle. It doesn’t have to be a permanent way of life. You can work extra just until you pay off your holiday debt or your most pressing credit card debt. 

Sell unwanted items like unused gifts or household goods you don’t need. You could sell items through an online marketplace, or the old-fashioned way with a yard sale.

Put any cash windfalls toward your debt. If you get a bonus at work or a tax refund, those are great opportunities to speed up debt repayment.

Boost Your Income to Tackle Holiday Debt

Even an extra $100 or $200 per month could shave months off your payoff timeline and help you save on interest. Here are some ideas to boost your income.

Apply for seasonal work

Many businesses need temporary help after the holidays. Call centers may be looking for customer service agents to handle higher call volumes. Distribution warehouses may need more employees to process returns. Ski resorts get much busier during the winter season. Those are just a few examples of work that’s often available during the winter months.

Tap into freelance opportunities and the gig economy

You could turn your skills and knowledge into a sweet side gig. There’s all kinds of work to do on a freelance basis or through online gig platforms, including:

• Tutoring

• Driving for Uber or Lyft

• Deliveries

• Translation.

Make the most of tax refunds and bonuses

If you’re due a tax refund, file your tax return as early as possible so you can put that money toward your debt. Earmark any bonuses you get at work for holiday debt, too.

Sell unwanted gifts

It’s okay to part with gifts you don’t see yourself using. You may be able to return gifts that included the receipt. If not, you can always try selling them yourself.

Rent out your car or space around the home

You could turn assets you own into extra cash, usually without too much work on your part. For example, if you don’t need your car every day, you could rent it through an online marketplace. Have a spare room? See if you can rent it out on occasion. You could even rent space in your home to use as storage.

Professional Help for Holiday Debt

You might find that you have too much debt to handle on your own. If you can’t make all your payments even after working on your budget, consider seeking out professional debt help.

A debt relief company could help you settle your holiday debt and other unsecured debts. Here’s how debt relief works, and the benefits it offers:

• The company helps come up with a debt relief plan built around your income and expenses.

• Instead of juggling payments to all your creditors, you make one monthly payment into a dedicated debt settlement account.

• Expert Debt Consultants negotiate with your creditors on your behalf. You review the offers and decide whether to accept, but you don’t need to negotiate yourself.

• You may be able to get significant debt reduction. 

Debt settlement might be a good solution if you have a financial hardship and genuinely can’t afford to fully repay your debts. With the help of a debt relief program, you could settle your holiday debt and move on with your life. Check out our guide on who could benefit from Freedom Debt Relief’s services to see if it matches your situation.

Another option is credit counseling. A credit counselor could set up a debt management plan (DMP) with your creditors. A DMP is a three- to five-year plan in which you make one monthly payment, and that payment gets divided between your creditors.

Practical Tips to Avoid Holiday Debt

Here’s some simple, easy-to-follow advice that can help keep you out of holiday debt.

Set up an automated holiday savings account

Make a savings account specifically for your holiday spending. Or see if your current savings account has a savings “buckets” feature, which lets you set up buckets for different money goals. Decide how much you want to contribute each month, and then set up an automatic transfer for that amount. 

Use cashback rewards strategically throughout the year

Cash back credit cards and apps can be an easy way to earn money back on your usual spending. If possible, send your cash back to your holiday savings account to give it a boost. You could also hang on to your cash back, and put it toward holiday shopping at the end of the year.

Create gift lists and price tracking early

You don’t need to wait until November or December to shop for holiday gifts. Brainstorm gift ideas for your loved ones earlier in the year, and track prices with your favorite retailers or through online apps. Getting a headstart could help you snatch up great deals.

Try alternative gift-giving strategies

For example, you might suggest a Secret Santa gift exchange at your family gathering or the office, so that everyone only needs to buy one gift. Shop for affordable experience gifts, such as an escape room or event tickets. Trying something different can spice up the gift-giving experience and make it more affordable.

Choose a holiday plan within your means

Remember that the holidays are about enjoying yourself and spending time with the people you love. You can do that on any budget, so choose a holiday spending plan that suits your financial situation.

Spread your spending throughout the year

Tackle holiday expenses, including gifts and travel bookings, over many months. You could score better deals this way, and as an added bonus, you don’t need to do a ton of last-minute holiday shopping.

Here are some tips to help:

• Sign up for special deals from your favorite stores to take advantage of good offers throughout the year. 

• Shop during sales events like Cyber Monday. If you can finish your holiday shopping during the week following Black Friday, you also might have a more relaxed December. 

• Book air tickets in advance. If you can’t find good deals, consider delaying your travel to a less-busy period.

• Shop for next year’s decorations toward the end of this year’s holiday season. You might find discounts as large as 90%. 

Stick to your spending plan

Resist the temptation to make impulsive purchases, even when shops offer large discounts. Check your spending plan and shopping list before you shop, and try to stick to the list. 

Find low-cost ways to enjoy the season

You can have a fun time while following a smart spending plan. For example, your friends and family might like memorable gifts like fun photographs from your past. Replace some nights out with game nights at home.

Use credit well

Try your best to pay off your credit cards in full by the payment due date. If you pay in full, your credit card company won’t charge you interest on your purchases. If you find it hard to follow a budget with a credit card, try sticking to your debit card.

A budget can help you enjoy your holiday season and start your new year without money worries. If you don’t have a holiday budget yet, get started today.