AMES, Iowa -- The joy over holiday gift-giving can often turn into the grim reality of overspending debt when January bills come due. And some people struggle to navigate the slippery slope of mounting debt once they go down that path in the new year.
"Absolutely, it's the credit card coma, as I like to call it," said Tim Griesdorn, an assistant professor and state extension specialist in family finance within Iowa State University's Department of Human Development and Family Studies. "We find it a lot easier to spend than to pay back."
Griesdorn recommends a two-pronged approach for people to become debt free and stay that way:
1. Control discretionary spending through the use of
cash.
"Discretionary spending are those
things that are variable but we have some control over, such as
groceries, entertainment, clothing, etc.," Griesdorn said.
"I recommend the envelope system where you use a budgeted
amount of cash in an envelope or your wallet for those
discretionary items and you don't turn to credit cards.
That's an approach that's been around for a long time
and it's self-regulating. Once you run out of cash in that
envelope for that time period, you try to delay the purchases
until you get cash with the next paycheck."
2. Treat your non-monthly expenses as a monthly
bill.
"We do a great job of the expenditures
we see each month -- such as a mortgage payment, car payment,
putting food on the table, or utilities -- but there are a
whole bunch of expenses that we don't see every
month," Griesdorn said. "There are things like
Christmas that happen every year, but we don't really think
about it until it approaches. So we have this fairly large
expense, but we fail to plan for it through the previous 12
months.
"A better way of living is to take all those non-monthly expenses, estimate how much you spend on them over a year's time frame, and divide that expense by 12 and treat it as a regular bill," he continued. "Without that in front of you staring you in the face, you will overspend your regular income and not even realize it."
Griesdorn warns that if we don't do a good job planning for non-monthly expenses, they then become an "emergency."
"And that's when you turn to plastic," he said. "You reach the point where you say, 'I have to pay my car insurance and I don't have the cash because I haven't saved it over the last six months. So for this emergency, I'm going to charge it and pay it back as I can.' And these so-called emergencies add up over time, and that leads to going deeper and deeper in debt.
"So if people want to stop the merry-go-round and start making good progress, they have to do a little bit of planning," he said.
One way Griesdorn says people can do a better job with their financial planning is through "Take Control of Your Money," a free online course provided by Iowa State University Extension and Outreach.
"Your Money, Your Future ONLINE" is another ISU Extension and Outreach option. The online course begins the first Monday of each month, with the class meeting from 6 to 7 p.m. for three straight weeks. It costs $15 and pre-registration is required by the Friday before the first class begins each month. More information and registration is available here.
