Debt Management for the Holidays

New research shows that, for the first time, Americans collectively owe four trillion dollars of consumer debt, excluding home mortgages.  That’s such a significant number; it can be meaningless for the average reader, so let’s zoom in a bit.

In 1950, the inflation-adjusted median household income was about $30,000, with only about $500 in consumer debt (less than 2%).  Today, the median household income is $78,000, with household consumer debt averaging about $31,000, or 40%.  This is excluding home mortgages.  The main driver of the rising debt-to-income ratio has been the introduction and extensive use of credit cards.

If you have an income of $78,000 from which you must pay income taxes and living expenses, you can bet paying off $31,000 will be a painful and lengthy process.  The holiday season is the one time of year when people tend to overspend the most and face a higher-than-normal stack of bills in January.

It doesn’t have to be that way.  With a little bit of planning, you can start the new year with no new debt.  Here’s how:

  1. Decide how much you’ll spend.  Take a moment to decide just how much you’re willing to spend, overall, on gifts during this holiday season.  Focus on cash that you already have in savings, money market, or checking accounts versus credit card limits.
  2. Make a list.  Now that you have your budget, make a list of all the people you’d like to give gifts. Start with the children and then, beside each person’s name, put a dollar limit on the maximum amount you plan to spend, taking care to make certain your individual totals don’t exceed your overall budget.  It’s ok to use credit cards for your purchases as long as you have the cash to pay off the full balance when it arrives the following month.
  3. Focus on the children.  If your resources are more limited, consider establishing a ‘moratorium’ on gifting between spouses, other family, and friends and focus on gifts for your children. They are the people who are most excited and have the highest expectations during this holiday.
  4. Give something back.  Use this holiday season to teach your children the importance of giving to others who are in need.  There are many ways to accomplish this.  You can donate clothing, food, money, or you can spend some time working in one of the many shelters located in your hometown.

Don’t forget that there are lots of gifts that show you care without spending a fortune.  One of my favorite gifts each year is a spicy cheese ball a friend gives us at Christmas.  Or it can be as simple as a personal note expressing what one’s friendship has meant to you.

Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.


4th Quarter Planning (series): Avoid New Debt this Holiday Season

  • Average consumer debt equals 40% of income

Develop your holiday spending plan

  1. Set a budget based on cash available
  2. Make a list of gift recipients
  3. Focus on the children- buy for them first
  4. Practice giving back 

Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including  J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. More information about The Welch Group and important Disclosures can be found on our website. Investing in securities involves the risk of loss. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable or equal any historical performance level(s). Consult your financial advisor before acting on comments in this article.