How to avoid running out of cash this Christmas - Sarah Coles

Most of us have bought the lion’s share of the presents, and we’re heading into the final straight of wrapping and buying every single item in the supermarket. The only problem is that by this stage, an awful lot of us have run out of cash.

Every year we ask people how they’re planning to pay for Christmas, and most people say they will cover at least some of it from their income.

This year a combination of the soaring cost of Christmas and the rising price of everyday expenses, mean that this fell to 45 per cent. Around a third have savings to tap into, but, for those whose financial resilience has been eaten away over the past few months, there are no savings left, so there’s every chance they turn to borrowing.

One in seven people put at least some of their Christmas spending on a credit card. Parents are even more likely to fall back on plastic – with one in five taking this approach.

We’ve also seen a huge rise in buy-now-pay-later deals for Christmas, which one in ten people overall will use, including 14% of parents with children living at home.

We’re prepared to take on more expensive borrowing too, and one in 20 will use a store card – including one in ten of those aged 18-34. And when all else fails, one in 30 will borrow from family and friends – including almost one in ten of those with kids at home.

The borrowing figures are actually higher among those earning more. Higher rate taxpayers are less likely to pay for Christmas out of their income, and more likely to borrow. One in five use a credit card, 13% use buy-now-pay-later and 11% a store card. This is likely to be because those on higher incomes have more confidence they will be able to handle repayments, but it’s still storing a debt headache for the new year.

If you’re heading into the red to cover the cost of Christmas, it’s worth bearing in mind that even at this stage it’s not compulsory. There are a few things you can do to halt the expense before it goes too far. You’ll need to take stock: consider what you’ve already bought, what money you have left – if any, and what else you definitely need to get.

Then look at your to-do list and work out what you can cut. If you need to get food and drink, can you ask family to bring something with them? If you have presents left to buy will some of those people agree to skip gifts this year? Will you be able to re-gift something to them instead? If there are events that will cost money, which ones go you most want to go to, and which ones can you miss?

Don’t stop there either, because there could be cash to save from a spot of ‘un shopping’. Is there anything you can return, or anyone you can arrange not to buy for and give their present to someone else instead?

If you’re already in debt, or you can’t see any way to avoid it, then if you need to borrow, it’s worth thinking carefully about the best way to do it. If you don’t keep an eye on your spending, it’s easy just to slip into an overdraft – but this is one of the most expensive ways to borrow.

If you haven’t arranged an overdraft (or you go over the agreed amount), you won’t just rack up interest, you’ll also likely to have any direct debits or payments rejected, and your bank may charge a fee. It will be noted on your credit score too, which means it could be harder to borrow in future. Even if you’ve agreed an overdraft, the rates are exorbitant, so this shouldn’t be your first port of call.

Credit cards can be useful, but the rates on offer differ wildly, and there’s a world of difference between borrowing at 22% and getting a new card with a 0% deal on purchases for long enough for you to have paid it off before any interest is due. It’s also worth steering clear of store cards, which can charge up to 40% interest. If you grab one at the till because you’re offered a discount on your shop, you may well end up paying dearly for that discount.

If you use any kind of plastic this year, you also need to get into the right mindset. It’ll make an enormous amount of difference if you can avoid thinking of your credit limit as your money to spend – which will encourage you to spend more.

Try to think of everything you spend as more debt you’ll need to work hard to pay off later – which will help you keep a lid on things.

Once it comes to repaying the debt.

Your credit card company only requires a minimum repayment each month – which can be 1 per cent of the debt, plus interest. This can make us feel we’ve got thousands of pounds of debt under control, but if you don’t pay it off faster than this, you’ll rack up enormous interest charges and could end up borrowing for years.

So assume you always need to pay more than the minimum, make a plan for paying it back, and do whatever you can to stick to it.

Buy-now-pay-later deals often appeal, because there is no interest to pay if you stick to the instalments. Unfortunately, this can make us feel like it’s not really borrowing at all.

However, these are debts, and because there are only light credit checks when you take them on, there’s a risk you’ll rack up more than you can afford. If you use this form of borrowing, you need to consider how you will afford all the repayments, and keep a record of anything you borrow, so you don’t bite off more than you can chew.

Falling behind on bills

Figures from the Office for National Statistics show that one in 10 people aged 16-49 have a direct debit, standing order or bill they’ve been unable to pay in the past month. Women are almost twice as likely to be in this position as men.

And while this is causing real and immediate problems for millions of people, there’s a risk that others are building problems for the future. 1 in 12 (8%) have cancelled a financial product – such as a pension payment or life insurance – in the past month because of higher costs.

There’s a particular risk for those in the squeezed middle, in their 30s and 40s, who are most likely to cut back on savings (40%), so risk having nothing to fall back on as life gets tougher. Meanwhile one in 50 of them have cancelled life cover to make ends meet – more than any other group.

They’re also among the most likely to have cut back pension contributions (one in 50 of the under 50s have). This may feel like a safe cut to make, because you save money today and won’t pay the price until retirement. However, unless they pick up contributions as quickly as possible when the financial stress eases a little, they could end up spreading the pain of this decision throughout the whole of their retirement.

SARAH COLES is a senior personal finance analyst and podcast host for Switch Your Money On Hargreaves Lansdown