MHA: Dangers of the Christmas overspend

by Michael Reid, partner at MHA 

EVERYONE wants to enjoy this time of year, which tends to mean a little more expenditure than normal as the cares of the year are forgotten temporarily in an atmosphere of goodwill to all of those around us. This is only natural and for many, spending a few more pounds is perfectly affordable.   

During the year, some take steps to keep a few pounds aside each week, either in a separate bank account, biscuit tin or similar which provides the ability to spend. Others simply have plenty of cash and don’t worry about an extra few bank withdrawals …lucky them.   

However, there are many who are not so fortunate and find the whole festive season a financial challenge and are concerned about how they will be able to appear generous and also part of the process of eating, drinking, giving gifts, and generally making merry.   

It is acceptable to spend beyond one’s means on occasion as long as there is a plan to live more frugally at another time of the year so that any excess spending is balanced with saving.  

This involves a high degree of self-discipline and, for example, creating a budget that is followed closely. A budget should allow you to determine what is realistic. For example, one might split anticipated expenditure into categories such as “must have”, “keen to have”, “not necessary but would be good to have” and “indulgent”.   

The difficulty is that people will consider what falls into these categories differently and for example, one person might think that a new outfit, hairdo or manicure are essentials while another considers them fripperies that can be discarded if there is no spare cash.   

If cash is in short supply, consider whether your expenditure category is correct and even if it is a “must have”, can you source cheaper or approach the matter in a creative way? It is not embarrassing to say that you cannot afford something. Indeed, many would see that approach as being responsible and mature.   

A financial budget is a good way of listing incomings and outgoings. It is surprising how many people simply spend until they run out of money rather than seeking to understand their personal position. Some commentators argue that those in debt are vulnerable and pressurised by credit card/loan companies too much when debts are not being repaid. The view has been expressed that those who lend should be less over-bearing when pursuing recovery, perhaps because the initial lending facility was too easy to access. That may be true, but it must be remembered that there is no law that forces someone to use a credit card or take a loan i.e. it is a voluntary action.   

Clearly, there are those in our community who, for whatever reason, are genuinely cash-strapped and cannot afford the basics in life. Every penny is, quite literally, a prisoner. Suggesting that they should budget is often unfairly branded as being arrogant and failing to understand but, for us all, a positive attitude to, and understanding of, effective money management is crucial if you are to avoid worrying yourself into an early grave. There are plenty of sources of free advice.   

It should also be remembered that if you don’t settle a credit card bill at the end of a month or opt for emergency short-term loans, interest rates of between 30% and 99% are not uncommon. For anyone who is short of cash anyway, borrowing at such exorbitant rates merely reduces the cash available to spend generally because of the interest burden that has been created, and helps to reinforce the comment about creating a personal budget that is followed.   

All too often, my insolvency team consults with those who have overspent, not out of necessity to feed or clothe a family, but because they had no spending rules to follow and simply kept buying. It might make you feel good to spend a credit card company’s cash, but everyone knows that money does not grow on trees and hence, what you spend has to be paid back at some time in the future.   

Not repaying can easily make the debt burden too large to handle and, in desperation, back-street lenders might be used to bridge the gap. It can only be a short-term measure because, just like the gambler who borrows because the next bet is guaranteed to succeed … but doesn’t … a vicious debt circle quickly drags one into a downward spiral. The majority of the population want to act responsibly, no matter how much or little money is available to them, and that is why nobody should feel belittled about the subject or scared to ask for help.   

At Christmas, the advice is to budget carefully, keep an eye on what you are spending and don’t be shy about asking for help. Equally, if you know someone who is having money troubles, why not have a supportive word and persuade them to seek advice.   

Michael Reid is a licensed insolvency practitioner and partner of MHA. MHA is the 13th largest accountancy practice in the UK and counts SMEs across a variety of sectors, including energy, as clients. Its Aberdeen office is based at Carden Place.