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Cure Your Holiday Hangover

Did you go a little overboard during the holidays? Join the crowd. Surveys show that the average consumer blows his or her holiday budget by 15% to 30%.

Let's waste no time lamenting our overindulgences. It's time to get those finances back in tip-top form.

Belt-tightening 101
Dieting is so de rigueur this time of year. But more fruits and whole grains aren't going to do anything to slim down your spending. Debt triage requires a crash course in cash control. That means you need to:

  • Assess the damage. Use online calculators like these to see exactly what it'll take to pay off the cards.

  • Devise an aggressive payoff plan. It's worth repeating: To demolish your debt, you've got to mail in a sizeable chunk more than the minimum payment. Come up with your per-month debt payoff schedule, and then start digging around the couch cushions for extra coins.

  • Hack away at those interest rates. Nothing will fast-track your payoff plan more than getting lenders to lower your interest rate. (Well, a sizeable inheritance can help, but let's be realistic.) Check out "Save $756 With one Phone Call" for tips on negotiating with your credit card companies.

  • Cut back on your biggest expenses first. You'll see the biggest payoff for your efforts if you're able to shave your spending in the meals, entertainment, transportation, and apparel/personal care categories.

  • Institute strict spending limits. For this I like the "envelope method" of budgeting, in which you carry only the amount of cash you have to devote to those expenditures each week. Leave the cards at home. Or you can systematize your finances electronically with tools such as Microsoft's (Nasdaq: MSFT  ) Money or Intuit's (Nasdaq: INTU  ) Quicken. (In the December issue of Motley Fool Green Light -- which you can check out for free for 30 days -- I reviewed financial software for first-timers.)

  • Sell stuff. eBay, Craigslist, and Amazon.com's Marketplace all have platforms to help sellers clear out their closets. (Tip: Don't get sucked into shopping mode when checking out these sites. I speak from experience.)

  • Cut back on other savings goals. The vacation, new car, and highlights will have to wait.

  • Don't borrow from your future. Sure, you can take out a home equity loan or borrow from a retirement account, but you shouldn't. It's a bad habit to start, and the fees, taxes, and lost growth potential make it a very unattractive trade-off. If you do need to cut back on your retirement savings, do so only to the minimum amount for which your employer will match your contributions. Once you're done paying off the debt, return to your previous levels of participation.

  • Get the whole family in on it. Offer rewards (cheap ones!) for those who spend the least each week, and another for everyone when Holiday '06 is finally paid for in full.

Make a list for Holiday '07
If you put most of your holiday purchases on a credit card, guess what? You have a starting point for next year's year-end budget. (See, credit cards aren't all bad.) Use it as a blueprint for setting up a monthly savings plan.

Once your "What I Owe" column is back to $0, start socking away money each month in a separate, hands-off savings account. (Check out some of the high-yield money market savings accounts out there. You'll earn interest on your savings, and because of built-in withdrawal limits, you'll be less tempted to dip into the account during the rest of the year.)

Not just for Christmas
For a true-life rags-to-riches-to-rags tale of debt, read this article by my colleague Tim Beyers. As Tim's soul-baring account shows, the demons of debt can strike at any time and for many reasons. The key is having a plan and support system (that's us!) in place.

$686 in money-saving, money-making advice
For more advice on curing your debt hangover (and our picks for the best no-annual-fee credit cards for balance transfers), check out the latest issue of our Motley Fool Green Light newsletter free for 30 days. Also in the January issue: a month-by-month calendar of money must-dos, advice on rolling over that old 401(k), three investments that may help you profit from the current political climate, and easy ways to automate those New Year's financial resolutions. All told, the advice in the January issue is worth $686.

Amazon and eBay are Stock Advisor selections. Microsoft is part of the current crop of Inside Value picks, while Intuit was a former selection.

Since joining The Motley Fool, Dayana Yochim dropped the "shop to save" approach from her financial workout plan. She is the co-advisor (with Shannon Zimmerman) for Motley Fool Green Light, a personal finance/beginning investing service that provides easy-to-follow remedies for every kind of financial hangover. She owns none of the companies mentioned in this article. The Fool's disclosure policy always pays cash for its fruitcakes.


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