A six year old boy had a perplexed look on his face. When asked by his father what was the cause of concern, the boy’s reply was “I don’t understand how Santa runs his operations!” The boy was befuddled as to how Santa could afford to GIVE toys away. When he thought about the cost of raw materials to make the toys, wages for the elves, and the cost of fuel for delivery, and with no apparent income, it didn’t quite add up. The father thought for a while and then his response was “I believe that Santa Deficit Spends.”

Deficit spending occurs when an individual’s income (inflow) is not able to support the monthly expenditure (outflows). Sometimes, this may be unintentional, as during a month unpredicted or emergency events could occur, which may throw the best of budgets out of line. This is where the options are to withdraw from savings or to seek a loan. Sovereign nations are adept at the borrowing of funds, this from multilateral lending agencies or from the private capital market, but unlike ordinary folks, they have the ability to “print money” or tax the citizens more in order to repay outstanding debts.

Individuals may have a grave problem if monthly expenses continuously exceed salary. The most popular and convenient loan structure today is the use of the credit card. When using credit cards instead of cash it does not feel like you’re spending real money. They can make spending too easy. If you are not aware of the debt you’re incurring, you are more likely to create more debt than you originally intended. The pleasant feelings you experience when you purchase the item are disconnected from the unpleasant or painful feelings of making the payment when you get the credit card statement. Credit card companies and lending institutions offer enticing opportunities for people to incur debt. A common mistake people make is assuming that if these institutions creating opportunity for you to have debt, must think you are in a financial position to pay it off. It is not their responsibility; it is ours to determine our ability to repay debt. Credit card companies agree to loan you money interest free for approximately 20-28 days. You can use this to your advantage as long as you pay off the “loan” by the due date each month. Alas, one problem with credit cards, however, is that they give you the urge to splurge. This can be uncomfortable, but if you don’t address this problem, you may never get control of your spending and your debt. If you’re always trying to pay off yesterday’s purchases, many of which have long since worn out or been forgotten, how will you acquire the things you truly want for tomorrow? Some consumers are more in debt than the government, not a flattering comparison.

Our local interest rates had been steadily climbing upwards, and as this will affect all credit facilities it is therefore incumbent on persons to adhere to their budgets. For dual currency credit card holders, just glancing at the movement in the exchange rate during this past month should sober the fear of overshooting planned spending this season.

There are several strategies to help you to take control of (or gain control over) your credit card spending. 1) The most powerful and most difficult, is to stop carrying it with you. The most common concern expressed when this is suggested is, “I need it for emergencies.”

The question to ask yourself is, “When was the last time you needed a credit card for emergencies?” By simply having the credit card you are likely to spend. If it’s is not on your person it decreases impulse spending, allowing you time to find other creative solutions to a financial situation other than incurring more debt.

2) Develop a plan to repay the debt you are about to create. This should be done in a timely way to reduce the impact of high interest charges. Sit down and write down exactly how much debt is owed. This is a basic straightforward starting point but one which is often overlooked, simply because of the fear of knowing the actual numbers. Look at which card balances carry the highest rate and develop a strategy to reduce the balance on that one first. Making just the minimum payments each month cannot be an option. At least make a payment that is in excess of the minimum due. The minimum payment amount is simply the interest amount due on the principal. If you only pay the minimum you will never pay off the card.

If you have savings that you do not want to dip into to pay off the credit cards, take a long hard look at what you are earning on your savings and what you are paying on the debt. One is always higher than the other and it is not your savings interest rate. Use your savings to get out of debt and know that you can always charge an emergency on your credit card. Take the interest charges you are not incurring every month and save that instead.

‘Tis the season of giving, but the best thing would be to do it within limits in order to give yourself a break in the New Year. We don’t hear from Santa for 11 months, maybe he’s busy paying off his deficit.

David Weir is a Manager – Investment and Client Services with Sterling Asset Management Limited. Sterling provides medium to long term financial advice and instruments in US and other world market currencies to the corporate, individual and institutional investor.

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