Tackling Holiday Debt

The holidays are a time for giving, but they can also leave you with a financial hangover in the form of credit card bills and holiday debt. The good news is that you don't have to carry this debt for months - or even years - if you approach repayment strategically.

By using a combination of smart debt repayment methods, budget adjustments, and perhaps increased income, you can knock out your holiday debt and start the new year with a clean slate.

Whether you're dealing with multiple credit card balances or a single large bill, these strategies will help you stay on track and minimize interest payments.

Debt Snowball Method

The Debt Snowball Method is one of the most popular approaches to paying off debt because it focuses on building momentum. This method involves paying off your smallest debts first while making minimum payments on your more significant debts. By knocking out smaller balances quickly, you gain psychological wins that keep you motivated.

Here's how it works:

• List all your debts from smallest to largest, regardless of interest rates.
• Pay the minimum on all debts except for the smallest one.
• Direct as much extra money as possible toward the smallest debt.
• Once the smallest debt is paid off, move to the next smallest, and so on.

Many people find the Debt Snowball Method effective because it's all about achieving quick wins. By eliminating smaller debts early on, you experience a sense of progress, which can fuel your motivation to tackle larger balances.

This approach is ideal if you struggle with staying motivated to pay off debt or have multiple small balances you want to get rid of quickly. But keep in mind that, depending on the interest rates of various account balances, focusing on the smallest debts first may yield a higher overall cost since the smallest debt doesn't always have the highest interest rate.

Debt Avalanche Method

The Debt Avalanche Method may be a better fit for those more concerned with saving on interest. This strategy focuses on paying off your highest-interest debt first, reducing the overall interest you pay over time.

Here's how it works:

• List all of your debts from highest to lowest interest rate.
• Pay the minimum on all debts except for the one with the highest interest rate.
• Direct as much extra money as possible toward the highest-interest debt.
• Once the highest-interest debt is paid off, move on to the next highest, and so on.

Some prefer this approach since it prioritizes high-interest debts, meaning you minimize the total interest paid. Thus, more of your payments will go toward reducing the principal balance, and your debt will be repaid faster.

The Debt Avalanche Method is ideal for people who want to minimize interest costs, especially if they have large balances with high interest rates.

Budget Adjustments

If paying off debt quickly is a priority, making budget adjustments can free up extra cash to accelerate your repayment. Reallocating your budget may require temporarily cutting back on nonessential spending, but the result is less debt and more financial freedom.

Look for areas in your budget where you can cut back, even if it's just for a few months. Dining out, entertainment, subscriptions, and impulse purchases are common areas where savings can be found. Use the money you save to make extra payments on your debt. For example, if you cut $100 a month from dining out and allocate it toward debt repayment, that's $1,200 a year, directly reducing your balance.

Next, remember that any extra income, such as tax refunds, bonuses, or even gifts, can be used to pay off debt faster. Make it a habit to funnel any unexpected money toward your debt to accelerate your progress.

Another Idea: Increase Income

If cutting back isn't enough to tackle your holiday debt, consider increasing your income through side gigs or freelance opportunities. While not an option for everyone, the additional income earned can provide a boost to your repayment efforts, helping you get out of debt faster.

From driving for rideshare services to freelancing online, your area may have opportunities for extra income. Even a part-time side hustle for a few months can provide significant extra cash to throw at your debt.

Also, many retailers offer seasonal jobs during the holidays, and some employers may provide overtime opportunities. If you are available, taking advantage of these opportunities can boost your debt repayment efforts significantly.

The Takeaway

Paying off holiday debt doesn't have to be a long, drawn-out process. By using strategies like the Debt Snowball or Debt Avalanche methods, adjusting your budget, and exploring additional income opportunities, you can eliminate your debt faster than you might think. The key is to stay focused, be proactive, and prioritize debt repayment in your financial plan.