This holiday season, spending increased 7.9 percent from a year ago (according to the MasterCard Spending Pulse report). People spent more money on gifts, making many retailers happy and helping the overall economy.
Although the increased spending will be applauded by retailers, many American households are left with a precarious post-holiday financial situation. The euphoria of giving gifts will undoubtedly be replaced by a predictable debt hangover in January. MagnifyMoney conducted a national survey, and found that:
- American consumers spent without a plan. 50.7% of people set no holiday budget at all. A further 15.1% of people set a budget, but ignored it and spent more than planned. That means 65.8% of people had no control over their holiday spending.
- After spending money on holiday gifts, a majority of Americans are “broke.” 56.3% of people surveyed have less than $1,000 combined in their checking and savings account.
- Credit cards will be used to fund a big portion of holiday purchases. 38.3% of the people surveyed will not be able to pay off their credit card in full this month. High interest rate credit cards were used to fund holiday debt.
- Despite the debt, there was “no regret.” Despite borrowing money at high interest rates to fund holiday purchases, 85.7% of Americans have no regrets about their holiday spending.
During the 2015 holiday season, American consumers have demonstrated their willingness, and apparent happiness, to spend money they don’t have on gifts they can’t afford.
But in just a few days, people will start making New Year’s Resolutions. And if 2016 is like any other year, two themes will dominate the resolutions made across the country. People will promise to become physically fit and financially fit in the New Year.
One of the top resolutions made in January 2015, according to Nielsen, was to “spend less and save more.” This is a recurring theme, and we can expect similar resolutions in 2016, as the credit card statements start to arrive and the debt hangover begins.
However, Nick Clements, Co-Founder of MagnifyMoney, has two messages for people who have found themselves deeper in debt after the holidays:
First, we need to learn valuable lessons from our grandparents and great-grandparents about how to manage money. Before credit cards ever existed, people would only spend money if they had it. Most of our grandparents would have never even considered borrowing money to buy people gifts during the holidays. If we don’t develop that same type of mentality, any New Year’s Resolution will fail. I don’t want to sound like a belated Grinch, but borrowing money to buy gifts should have left more people feeling regret.
Second, people need to be wise about how they try to fulfill their New Year’s Resolution to become financially fit. Skipping a few lattes isn’t going to do the trick. I recommend taking a day off, and spending as much time and effort building a financial plan for 2016 as you did organizing your presents and your holiday parties in 2015.
Survey Results in More Detail
There was no spending plan or budget in place
- 50.7% set no budget. Instead, they “just spent.”
- 34.2% set a budget and followed the budget.
- 15.1% set a budget, but ignored the budget and spent more.
A majority of Americans are “broke”
- 24.8% have less than $100 in their accounts.
- 23.8% have between $101 and $500 in their accounts.
- 7.7% have between $501 and $1,000 in their accounts.
- 16.4% have between $1,001 and $5,000 in their accounts.
- 27.3% have more than $5,000 in their accounts.
Most financial planners recommend having an emergency fund with at least $1,000. Ideally, the fund should cover three to six months of living expenses. 56.3% do not have even the minimum of $1,000.
A significant minority will be paying off their credit cards for a long time
- 61.7% of people will be able to pay their balance in full.
- 27% will take some time, but pay more than the minimum due.
- 11.3% can only afford to pay the minimum due.
For the 11.3% paying the minimum due, they can expect to stay in debt for more than 25 years and will end up paying more interest than the original amount borrowed.
Despite the spending, we felt no regrets.
- 85.7% do not regret the amount of money they spent.
- 14.3% do regret the amount they spent.
- Of those with no regrets, 13.3% felt they could have spent more.
Tips for A Successful New Year’s Resolution
When the credit card bills start to arrive in January, many people will start to feel the annual debt hangover. As an antidote, people will start making resolutions to spend less, save more and get their finances in order.
MagnifyMoney believes that people should spend as much time in January building a financial plan for 2016 as they did shopping in December for the holidays.
For people in credit card debt, MagnifyMoney has a free 45 page Debt Guide available for download. This guide helps people prepare a customized action plan to lower interest rates, build a budget, negotiate hard with creditors and become debt-free.
In addition, MagnifyMoney recommends that all people spend time in January 2016 doing the following:
- Understand where your money actually went. When people create forward-looking budgets, those budgets almost always balance. Yet, when people look back in time, they have usually spent more than they planned. The best way to diagnose your spending problem is to understand where the money has actually gone. And there are great apps, like LevelMoney or Mint, which can help you understand where your money has gone. We particularly like LevelMoney, because it splits your expenditure into fixed, recurring expenses and variable expenses.
- Review your credit report from all three reporting agencies. You need to know what is on your credit report in order to build a good credit score. You can download your report for free at AnnualCreditReport.com.
- Understand your credit score and put together a plan to improve your score during 2016. People with the best scores never charge more than 10% of their available credit and pay their bills on time every month. Not only is that good for your score, but it is good for your wallet. And you can now get your official FICO for free in a number of places. Otherwise, you can get your VantageScore at sites like CreditKarma.
- If you have a good credit score, all debt can probably be refinanced. Mortgages, student loans, auto loans and credit cards (with a balance transfer or personal loan) can all be refinanced. Although the Federal Reserve increased interest rates in December, the rates are still very low. Find ways to lock in much lower interest rates now to help you pay off your debt faster.
- There are two big warnings with refinancing. First, try to avoid extending the term to get a lower payment. The biggest trap people fall into with refinancing is that they lower their rate and extend their term. By doing this, you might end up paying more money in the long run. Second, be careful before you refinance federal student loans, because you give up valuable protection.
- Automate all of your decisions, including savings and making credit card payments. Data has consistently shown that automating decisions greatly increases the likelihood of achieving your goals. To build that emergency fund, set up automatic transfers from your checking to your savings account. (Even better, get a higher interest rate online account and keep it completely separate from your checking account). To build your retirement savings, automate your 401(k) or IRA contributions. And to pay your credit card bill, automate your monthly payments.
- “Net worth” is not just a concept for the rich, and you need to focus on your net worth now. Net worth is a simple concept: it is what you own minus what you owe. Building wealth and being financially responsible means you are building your net worth. It doesn’t mean you make your payments on time and have a fancy car. Focus on the right number: building your net worth.
The survey was conducted by Google Consumer Surveys for MagnifyMoney between December 24 – 26, 2015. 532 people responded to the questions in a nationwide, online survey. All respondents were 18 or older.
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