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How to avoid a holiday debt hangover

By Gregory Karp

Chicago Tribune

Published: Friday, Nov. 26 2010 7:40 p.m. MST

Erin Huffstetler, who writes for the frugal-living section at About.com, said she's generally a fan of layaway. In a poll of frugal-living readers, 72 percent said they would use layaway this year.

"When you shop with a credit card, it's easy to put off paying for gifts," Huffstetler said. "That's not the case with layaway. If you don't pay, you don't get to take home those gifts."

Avoid using layaway on low-priced items, or your overall cost might be higher than if you used a high-interest credit card. Paying a $10 layaway fee on a $50 sweater is about the same as charging it on a 20 percent credit card for a year. And if you decide you don't want the item, you end up paying an additional $5 or $10 cancellation fee.

HOW TO AVOID HOLIDAY DEBT:

Use the 1.5 percent rule. Don't spend more than 1.5 percent of your total gross income on holiday-related expenses. If you're in debt, consider spending less than 1 percent.

Pay cash. Using cash involves a type of psychological pain that consumers don't feel with other forms of payment, said Farnoosh Torabi, author of the new book "Psych Yourself Rich." Studies have shown people spend 20 percent more with credit cards, she said. "Cash limits us from spending more than we have, while using credit cards feels like free money and that it goes on forever," Torabi said. "I like cash, seeing the money literally leave your wallet. There's something about that that causes a shopper to be cognizant of what they are buying."

Stick to a list. Lists help shoppers stay on task, which can save time and money, Torabi said. A list also narrows your options, which is a great benefit psychologically. "Behavioral experiments show that when consumers narrow their options, they make better decisions," she said. Your list should also include a price range for each item, such as a sweater between $20 and $50, she said. "And have some backups as well," she said, "so you don't find yourself at a loss if something is out of stock or unavailable."

Shop online. If you're worried about impulse purchases busting your holiday budget, stay out of the malls. Sit down at the computer for a goal-oriented session of online shopping. That way you won't be susceptible to the in-store sights, sounds and smells that lead to impulse buys.

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