Going into the holidays this year, the typical consumer expected to spend over $700. And while the data isn't out yet on how much the average American actually spent, it's fair to say that many of us well exceeded our budgets.
If you're coming off the holiday season with a small (or not-so-small) pile of debt, you should know that the sooner you work on paying it off, the less damage it'll do to your finances. Here's a step-by-step approach to recovering financially from what's often the most wonderful yet expensive time of the year.
1. Create a budget
Despite the fact that following a budget is one of the easiest ways to track finances, the majority of Americans don't do so. If you're looking to dig out of the hole you created by overspending on the holidays, the first thing you'll need to do is put together a budget that outlines your monthly expenses. This will help you not only manage your money going forward, but figure out how much of your debt you can afford to repay each month.
Don't know where to start? The good news is that creating a budget is easy. All you really need to do is list your recurring expenses, factor in one-time bills, and compare your total to the amount of money you bring home each month. If you find that your paychecks are completely maxed out, then you'll need to take steps to free up cash to chip away at your debt.
2. Figure out which debts are costing you the most and pay those first
Maybe you ran up a $700 balance on one credit card, a $500 balance on a second card, and a $300 balance on a third. At first glance, the obvious approach might involve tackling the $300 balance first, since it's the smallest and, conceivably, the easiest to wipe out. But what if that credit card with the $300 balance offers the lowest interest rate of the bunch? In that case, paying it off first makes the least amount of sense.
If you're eager to pay off your holiday debt quickly, then you'll need to tackle your balances in the order of most to least expensive -- and by "expensive," we're talking about interest rates. In other words, pay off your balance with the highest rate first, and work your way down the list until you're in the clear. Another option? See if you qualify for a balance transfer, which will allow you to consolidate your debt onto a single credit card, and, ideally, one with a more favorable rate than what you're currently working with.
3. Cut expenses to pay off debt more quickly
Remember that budget we talked about? If it doesn't leave you with much wiggle room for savings, then you'll need to think about cutting expenses to come up with the money to pay down your debt. You can approach this in one of two ways -- either slash a bunch of smaller expenses or reduce one major expense category, like housing or transportation.
Which should you choose? It depends on which changes are least likely to impact your qualify of life. If giving up your beloved morning coffee, store-bought lunches, and weekend entertainment will result in instant misery, then you might consider unloading a vehicle or downsizing your apartment instead. On the other hand, if you love having access to a car and living in a spacious home, then you might prefer to cut back on prepared food and leisure. It's really up to you, but the key is to free up enough money in your budget to not only repay your debt quickly but improve your savings going forward so you're less likely to wind up in debt again.
4. Get a side hustle
Perhaps you've examined your budget and can't identify a single expense with room to cut. Or maybe you're just not willing to sacrifice the things that make you happy. In either scenario, a side hustle is a great solution to a looming debt problem. If you're willing to work a secondary gig, you'll have extra money to play with -- money you can immediately apply to your debt, since you weren't counting on it to pay your bills in the first place. Of the 44 million Americans who currently have a side gig, more than one-third bring home a good $500 a month as a result -- so even a temporary stint could help you dig out of debt before you know it.
Nobody wants to start off a new year in debt. If you follow these steps, you'll have a clean slate to work with soon enough.