FOOL'S EYE VIEW
The Best Christmas Present

By Bruce Jackson (TMFGoogly)
December 27, 2001

This article was first published on 30 November, 2000, but it's still every bit as relevant today!

Get out of debt! Do it now. Get rid of that credit card balance. It's costing you about 15% per annum, at least. On a credit card balance of £2,500 -- the UK average -- it's costing you £375 per annum! That's money down the drain. Gone. Kaput. It is ex-money.

To some people, £375 may not seem a lot of money. They've obviously got too much for their own good. I hope they are giving some of their excess cash to charity. Think of it this way. If you lost your wallet or purse and it had £375 in it, would you be upset? I sure as hell would be.

Stop Saving

Before you even think about saving money, get out of debt. And by debt I primarily mean credit card debt. If you are living in your own house, mortgage debt is fine, presuming you haven't overstretched yourself. Mortgage debt is an essential living expense, rather like rent is, and the rates of interest are comparatively low. Cheap student debt is arguably OK too, providing it really is cheap, and that's usually the Government type of student debt, which is pegged at the rate of inflation. But that's about it. All other debt is BAD.

You obviously need cash for essential day to day expenses, but if you have a credit card balance you do not need a savings account. What you need is a high-interest current account, of which there are plenty available these days. After essential living expenses, and a small pot for those unexpected emergencies, every excess penny in your current account should be used to pay off that credit card balance.

Yet, many people have both credit card balances and savings accounts. They are kidding themselves. THEY ARE NOT SAVING MONEY. These people should get realistic, and fast. They are using their savings account to save up for a holiday or a car or meal out THAT THEY CAN'T AFFORD.

Killjoy

Call me Mr Scrooge. Why shouldn't people enjoy themselves? You only live once, and besides, you can't take the money with you. Whilst I have some sympathy with these views, it doesn't stop the fact that in general people with credit card debts are being unrealistic.

At Christmas, Britons go on their annual spending spree. Credit cards are hammered as the country spends, spends, spends. Most people will take the attitude that "December is an excess month -- drinking, eating and presents -- and I'm going to enjoy it and worry about paying it off in the new year."

But in most cases it's a vicious circle. Inevitably that credit card balance never disappears. And before you know it, it's December again. Oops. Maybe next year.

And so it goes on.

What Can You Do?

Enjoy the festive season, but enjoy it within your budget. Family and friends will still enjoy your company, even if you spend just a little less on their presents. Consider a "no presents for the adults pact" or having a £10 limit on presents for the kids. In December (or any month), rather than going out to the pub or for a meal out, invite people round to your place. They can supply the booze, you the food. It will be cheaper all round, and by some considerable margin.

You are being realistic. You are putting the stepping stones in place so that you can have a credit card debt free future. The cash you're NOT spending will eventually have the effect of reducing your credit card balance.

How To Pay It Off

You need to get completely on top of your financial affairs. Put simply...

• How much do you earn, after tax?
• What are your essential outgoings?
• What's left?

If the "what's left?" is negative, you're being UNREALISTIC. Rein in your expenses. You are living above your means. Many of us would like to own a second home in Spain or the south of France, but most of us are realistic enough to understand that that will never happen. So we don't borrow a massive amount of money in order to make that dream come true.

Why then do so many people borrow money in order to go out for a meal, buy some expensive Christmas presents or to go on an exotic holiday to Barbados? Like the villa in Spain, they can't afford it. But they still do it. Madness!

By following the simple "what's left?" formula above, you'll know exactly where you stand financially. You can then start chipping away at your credit card bill. At the same time, if you rein in your expenses, you will find that outstanding credit card balance quickly diminishing. In no time, it will be zero, and you'll have regained your financial independence, and be ready to SAVE.

Now Save!

Then you'll be in a position to save for that holiday, to save for that meal out. And ultimately to save for your retirement. There are plenty of ways to skin that particular cat, starting with ISAs and Pensions, and by God you need to -- the State Pension isn't going to get you very far.

Most people should be able to save 10% of their monthly salary. That's a good starting point. Open that savings account. On payday, have a standing order transfer 10% of your salary directly into that savings account. After a couple of months, you'll never know the cash is missing. Of course it's not actually missing -- you're SAVING money.

That is just the first step. But it is a HUGE first step. And then you'll be on your way to living a realistic and enjoyable debt-free life. Now that would be the best Christmas present you could ever get.

More: The Fool's decision centres for Getting Out of Debt, Online Banking, ISAs and Pensions. How to Invest When You Don't Have Any Money