Your 3-Step Holiday Debt Payoff Plan

Sitting on debt from December? Here's how to knock it out quickly.

We tell ourselves we'll be more disciplined during the holidays, but sometimes, temptation and generosity get the better of us. When that happens, we can easily end up in debt.

If you're closing out the holidays and starting off 2021 with credit card balances, it's imperative that you eliminate that debt quickly -- before interest starts accruing and you wind up throwing away money.

Getting out of debt can be overwhelming, so where do you start? Here's your three-step plan for paying off what you owe.

1. Get on a budget

What does budgeting have to do with paying off debt? A lot, actually. If you stick to a budget, you'll have an easier time keeping your spending in check and freeing up money to chip away at your credit card balances.

Setting up a budget is pretty simple. Just look through your credit card and bank statements from 2020, see what you spent money on, and figure out how much, on average, each expense type cost you. From there, list everything on a spreadsheet or find a budgeting app to use. If you see, for example, that you're supposed to spend $300 a month on groceries and your total comes to $200 by mid-January, you'll know to ease up or do some serious coupon-clipping (or cut back in another spending category to compensate since, well, you need to eat).

2. Cut back on spending

Having a budget can help you pay off your debt, but if you want to do so quickly, you need to spend less. And the extent to which you have to cut back depends on how heavy your debt load is. If you're coming away from the holidays with a $500 credit card balance, you may not need to make the same drastic changes as someone who's $2,500 in the hole. Figure out how much money it will take on a monthly basis to be holiday-debt free by the end of 2021, then identify expenses in your budget you can slash to get there.

Imagine you need to free up $100 a month to get rid of your debt. If you currently spend $80 a month on cable and can substitute your current package for a $15 streaming service instead, you're more than halfway there. Order takeout one or two fewer times a month, and you're all set. On the other hand, if you need to free up $300 a month, you may need to make a bigger change. That could mean something dramatic, like giving up your car and taking the bus -- which may be less convenient, but is also a lot less expensive when you factor in car payments, insurance, fuel, and automobile maintenance.

3. Figure out the most affordable way to consolidate your debt

If you owe money on a few credit cards, consolidating your debt could make it easier and less costly to pay off. One option to look at is a balance transfer, which means moving your existing balances onto a single card and making one monthly payment instead of several. Ideally, that balance transfer card offers a 0% introductory rate to make paying off that debt easier.

Another option is to take out a loan, use its proceeds to pay off your holiday debt, then pay that loan back month after month. If you own a home, you can look at a home equity loan, but given the closing costs you'll likely be charged, this option makes more sense when you have a substantial amount of debt to knock out. For a $500 balance, it's probably not worth it.

You can also consider taking out a personal loan, which will probably charge higher interest than a home equity loan, but is a good option when you're not a homeowner. Some personal loans also charge more modest fees at closing, so if your outstanding debt isn't tremendous, this may be a better option regardless.

Ending the holidays in debt isn't ideal, but it happens. Follow this easy plan, and with any luck, that debt will be gone by the time the next holiday season rolls around.