We don’t have full data on Christmas 2016 yet, because we have a bit of a hangover on our Christmas retail spending. It goes beyond Christmas. We’re all using our cash that we got at Christmas or our gift cards.
As of November, we saw sales growth of 3.8% over the previous year. That’s not fabulous, but it’s good. We’re waiting to see what we end up with once everything is done. It was a good year, but it wasn’t for all retailers; it wasn’t even across the board. The reason we pay so much attention to that is our spending fuels the economy. We look at the Christmas season to tell us what could possibly happen in the next year.
But that spending, if it’s done with debt, can lead to the debt hangover. We’re seeing a really big change in how we pay for Christmas. 31% use debit cards. That’s a good thing, because it acts like a check. The transfer of cash is immediate, and there’s no debt that you incur. Millennials love debit cards. They use them for everything.
Some people, believe it or not, still use cash: 27%. Again, no debt there.
29% of us are still pulling out that credit card. What we know is when we use a credit card, we tend to spend more, and that transaction creates debt that we’re going to have to deal with later. The average rate on credit cards now is around 16%, but expect that to rise as interest rates rise. The average balance (this is a big number) for anyone carrying credit card debt is $15,863. That’s a lot to face a new year with. The average number of credit cards per household is four. So we can fool ourselves into thinking we don’t have that much debt, but once we add them all up, we can see a lot of damage.
What can you do? The first thing is to make a plan to pay everything off. List each balance. List the interest rate on each card. Start with those low balance cards first just to give yourself a sense of accomplishment, and then concentrate on the high interest cards. The really hard part is, unless it’s an absolute emergency, don’t put any more on that credit card. Your goal should be to pay off those credit cards before next Christmas. If you do that, the payments you’re making on the credit cards can now go into savings to build an emergency fund or a Christmas fund for next year.
We did have a phone call on the radio from a dad saying that his teenage daughter thought that mascara was an emergency, so it’s all relative.
For most of us, we do need to have a credit card, because so many transactions, especially if you’re doing them online (which we’re shopping more online) require a card. Even though a debit card doesn’t create debt, a credit card gives you more protection in case someone takes your identity or takes that card. You can immediately say, “No, that was not something I incurred,” and that money does not come out. If it’s a debit card, you may have to go through months of wrangling to get that money put back in.
VIEWER QUESTION: How important is it to create a financial plan? And is there a recommended amount I should save each paycheck?
It’s very important. Would you take a journey without mapping out where you were going? Without having a destination? That’s what a financial plan does for you. You decide where you want to go and what you want your life to look like in the short term. Maybe you have a car you need to buy. Intermediate term: You’re going to buy a house or educate the kids. And long term: You have retirement. That’s what a financial plan does for you. It lays it all out.
How much should you save? That depends on what kind of lifestyle you want to have. I usually tell my students: As soon as they start that new job, save at least 10% in your 401(k). That should be your starting point and work your way up from there.
In this segment of Midday Money, Nancy encourages us to get into better financial health in 2017. Watch it online here.