Managing your finances after big holiday spending

The holidays are over, everyone loved their gifts, and you’re officially done splurging. Now’s the time to focus on helping your wallet recover after another season of gift giving. Overspending happens, but there’s always a solution to help you get back on track.

If you have a pile of bills from holiday spending holding you back from your homebuying goals, here’s how you can manage debt and clean up your post-holiday finances.

Setting up a budget

First, it’s important to know where you stand financially. The holidays are a joyous time of year, but not for your wallet. And if you’re looking to buy a home, that added debt can throw a wrench in your plans. Whether you went a little overboard on gifts for the family or had to use a credit card for funds, now is the time to take a hard look at your current debts and expenses.

Here are a few steps you can take to set up a post-holiday budget:

1. Review all of your statements from any holiday spending. Be sure to keep any monthly bills or expenses in mind, then start planning your post-holiday budget.
2. Don’t forget to redeem rewards if you used a cash-back or rewards card to purchase. These perks are typically time sensitive, so don’t wait too long to redeem them.
3. Review your down payment savings. Even if you avoided dipping into them, it’s important to know how far along you are with meeting your savings goal and determine whether adjustments need to be made. You’ll want to focus on paying down credit card balances, and depending on your financial situation, you may need to take a break from adding to your homebuying savings for the time being.
4. Put your credit card away and limit your spending. The after-holiday sales may be tempting, but it’s important to limit your spending and avoid overextending your budget while your wallet recovers. Rather than spending more, focus on making timely payments on your current balance to maintain your credit score.
5. Set realistic expectations. You can’t eliminate your spending entirely, so have a set amount in mind for daily purchases and shop or save with purpose.

Avoid credit card spending and short-term loans

Aside from setting up your new year budget, it is vital to avoid incurring any additional debt. Credit card spending and personal loans are tempting short-term relief, but they are both the easiest ways to run up your monthly bills and overall debt. Excessive spending and short-term loans can also have a negative impact on your credit and mortgage approval. Not only do they increase your debt-to-income ratio (DTI), but they may also stop you from qualifying for a lower interest rate for your mortgage.

The money may not be coming out of your bank account immediately, but that spending will eventually catch up with you. Large amounts of credit card debt and monthly loan payments will stack up and take a sizeable chunk out of your carefully constructed budget.

How to pay off credit card debt

Shouldering the weight of a large credit balance is costly, especially in the long run. It can be a huge obstacle in the way of your homebuying goals, but there are strategies you can utilize to pay down your balance or pay it off completely as you prepare to purchase a home!

Here are a few common strategies you can employ to pay off your credit cards after holiday spending:

The Avalanche Method — Preferred for homebuyers looking to save more money. Focus on paying off the card with the highest interest rate and continue making the minimum payments on your other cards. Once that balance is paid off, you can move onto the next card with the second highest rate, and so on.

The Snowball Method — Rather than prioritizing cards with high interest rates, this method has you focus on the smallest debt. Start by working to pay off the card with the smallest balance, while making minimum payments on the rest. Once that smaller balance is paid off, move onto the next smallest, and so on.

A Balance Transfer — Another way to save on interest and ultimately pay off your collective debts is to transfer your current balance to a credit card with a lower interest rate. However, it may cost you up front as many issuers charge balance transfer fees. Opening a new credit account may also impact your credit score and loan eligibility.

Ultimately, it’s up to you to decide which strategy you utilize to pay down your credit card debt. The important thing is to create a sustainable plan and stick to it on a daily basis.

Wants vs. needs

Adjusting your current homebuying and daily budget to address holiday debts can set you up for homebuying success.

You should have a solid idea of your wants versus needs. In general, your needs list should take up about 50% of your total budget. This may include monthly bills and payments, paying down debt balances, down payment savings, and your necessities. Your wants list should take a backseat for the time being and take up no more than 30% of your spending.

Once you have a deep insight into your current finances and a game plan for budgeting that you can maintain, you’ll be on the right road toward improving your finances after big holiday spending. Then you’ll have the peace of mind and be better prepared to conquer your homebuying goals.