 I read an article a couple of days ago that pointed out it was now only 20 weeks until Christmas. For most of us Christmas means time with family and friends, gift buying and summer holidays – always an enjoyable time of year.
Whilst an enjoyable time of year, that then got me thinking about the Achilles heel for most people at that time. How do we go about paying for the expense of Christmas gifts and summer holidays? Unfortunately I’ve seen all too often during my 32 years in the finance industry clients who dig themselves into a big financial hole through mismanaging their money, and it often starts from the lead up to Christmas and then the following summer holiday. If you don’t plan ahead, a lot of the expenses that begin to mount up in the lead up to Christmas can soon snowball into a debt servicing load that can become increasingly difficult and expensive to manage. Think of it this way – I’ll list below a relatively stereotypical hypothetical example of the type and amount of expenses families experience during the Christmas/New Year period.
Obviously this is not an exhaustive list, it’s simply meant as a typical example. However, what it does portray is how quickly costs can mount, and if no defined plan is in place the problem of how those costs are managed then occurs. Again stereotypically, for most people who haven’t made a plan they will choose to fund these expenses via their credit card. The negative effect of managing this way is further magnified if there is already a month to month balance being carried on the credit card account. For the sake of my example let’s imagine we have a client who already carries a month to month outstanding balance of $5000 on their credit card. Following the Christmas/summer holiday/back to school period the $5000 outstanding on the credit card has become $12000. $12000 that depending on what type of credit card you have you may be paying interest at an annual rate around 20% - clearly not a sound or cost effective financing strategy. Thankfully, the alternative to the unfortunately all too usual AND stressful scenario outlined above is simple. HAVE A PLAN. BE YOUR OWN BANK – In the example listed above with the $7000 in expenses across the Christmas/summer holiday/back to school period the $7000 can be broken down into a weekly amount of $134.62 across the entire year. By being prepared to formulate a manageable budget that provides the discipline to save the necessary $134.62 each week during the year you have funded the expense of that time of year out of your own pocket. Furthermore, this means that the $7000 expense has cost you $7000. In this specific example you have effectively become your own bank. If you had borrowed the money the end cost is impossible to determine because it would depend on both what length of time it took you to repay it, and also what interest rate you were being charged. Most importantly, by NOT borrowing the money you don’t have those further debt servicing costs. Interest costs (and anxiety) haven’t been added on. To learn more about the value of having an effective budget, and also to learn about the value in effectively managing your existing loans and bank accounts contact Leigh at Empower Money Management. 0407 439 827 leigh@empowermm.com.au www.empowermm.com.au
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