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Start Off 2018 With No Debt

Originally published on the HuffingtonPost on Dec. 11, 2017

Last year, the average American who took on new debt during the holidays came out an additional $1,003 in the red. Most of those who took on new debt didn’t plan to and weren’t able to pay it off for the next several months, if at all. Obviously, that’s not ideal: unexpected debt can lead to increased stress and decreased financial flexibility.

To set the stage for a zero-debt holiday season this year (and to give yourself a good shot at a debt-free 2018), do these seven things today.

1. Know where you stand.

It can be scary to face your finances honestly, but the only way to make a path forward is to get a snapshot of where you stand right now. That means taking stock of all your current debts, loans, income, investments – everything.

The best way to do this is to schedule it. Set aside an evening to review your monthly expenses and income, debt, and loan totals.

If you’re feeling ambitious, look for places you can cut back or earn more to give yourself some extra wiggle room over the holidays. For example, are you paying for multiple streaming services? Do you have a gym membership you don’t use? Could you negotiate a better deal on your internet?

2. Make a holiday budget.

Based on what you discover, work backwards to figure out how much you can afford to spend this holiday season. Try starting with a list of holiday expenses you usually incur, including:

  • Travel
  • Parties (outfits, food, drinks, decorations)
  • Gift exchanges (work, friends, family)
  • Charitable donations

If you can estimate what each will cost, you’ll have an idea of how you can mix and match to build a holiday season that fits your budget. To extend your budget beyond the holiday season, check out apps like Mint and Personal Capital or use a budgeting template to give you a head start. Not the app type? Make a spreadsheet!

3. Talk to your friends and family.

I get it: most people can’t realistically tell their family they won’t be able to make the trip home this year because it’s “not in the budget.” Instead, start a spending conversation. Eight in ten Americans are in debt, so if you’re feeling cash strapped, you’re not alone.

Try suggesting the idea of a gift-free holiday or a celebration that involves volunteering or simply spending time together rather than spending money. Chances are good that at least some of your nearest and dearest will be relieved.

If you have kids in your life who might not be as receptive to the no-gifts message, remember that your present to them could be something like a pizza-and-movie hangout at your place or a sleepover dance party. The gift of your time often means the most.

4. Set goals for 2018 (and beyond).

Once you’ve done the hard work of looking at your finances, it’s time for the fun part: deciding where you want to be financially and making a plan to get there.

Write down your financial goals for the short, medium, and long term, whether they’re as big as buying a house or as modest as springing for Spotify Premium. Having goals you can track and scratch off helps make the process of saving, budgeting, and investing more enjoyable and rewarding.

5. Commit to paying more than the minimum.

Fifty-eight percent of credit card users pay less than their full balance every month. As many as 29 percent note that they pay only the minimum some or all of the time. This isn’t ideal; every time you let a balance carry over, you pay interest, which means that you’re paying for the privilege to buy things.

The ideal way to use credit cards is for convenience: buy only what you can afford in cash, and pay off the full balance each month. Only 35 percent of people do that currently, but if you want to join their ranks, there are a few established strategies you can tackle. The most famous ways of eliminating credit card debt are the snowball and avalanche strategies.

6. Start an emergency fund.

Having a fund you touch only for emergencies (unexpected surgery, job loss, unexpected home repairs, etc.) is an essential part of staying debt-free. When you have cash on hand, you aren’t forced to turn to credit cards when unexpected expenses arise. Right now, most of us don’t have that kind of cushion; in fact, 47 percent of Americans say they’d have to borrow money or sell possessions to pay for an emergency expense of just $400.

So how much is enough for an emergency fund? Most experts agree that three to six months’ worth of expenses is ideal. Don’t let this number intimidate you: it’s better to have anything than nothing, so every little bit you can save will help prepare you for the unexpected.

7. Invest your money.

Once you’ve built the habit of putting money aside, it’s time to make it grow on its own. Not an investment expert? Don’t worry! Here are some ways you might get started:

  • Contribute to your 401(k) through work.
  • Start reading some trusted personal finance bloggers and join the MoneyTips community to get familiar with investing concepts so you’re empowered to make decisions.
  • Think about buying real estate (to either live in or rent out).
  • Consider using investing apps like M1 Finance, which allows you to invest up to $1,000 for free.

The holiday season can be particularly stressful if you’re trying to reduce your expenses or save money, but it’s also a great opportunity to take control of your finances. This winter, why not give yourself the gift of a smaller debt burden next year and beyond?