Avoid back-to-school debt

PERSONAL FINANCE

Your Money

August 08, 2006|By EILEEN AMBROSE | EILEEN AMBROSE,SUN COLUMNIST

The second-biggest shopping spree of the year is under way. Can you make it through without going into hock?

Signs so far indicate that families will spend billions more on back-to-school purchases than they have in the past few years. The typical tab is expected to be $527 per family, or 19 percent more than a year ago, according to the National Retail Federation.

And many have another incentive to spend. Maryland and about a dozen other states are giving consumers a reprieve from paying sales tax on certain purchases, to encourage shopping at home. Tax holidays drive consumers into stores, even when they are only saving, say, 5 percent, which is the sales tax rate in Maryland. Retailers likely would have to mark items 50 percent off to get a similar response.

"Americans have hated paying taxes all the way back to the Boston Tea Party," says J. Craig Sherman, a vice president with the Retail Federation. "The psychological appeal vastly outweighs the actual amount of money saved."

About this time, other eat-your-spinach articles would point out how much money you could save for retirement if only you invested the cash instead of spending it on book bags. This one won't. (Although it comes to a gazillion dollars.)

Instead, here are some tips to prevent yourself from going overboard:

Take an inventory. You might already have on hand some of the supplies - pens, pencils, unused notebooks - and don't need to buy them again.

Similarly, don't assume children have outgrown last year's clothes, says Trish Lynch, a counselor with ClearPoint Financial Solutions in Virginia. Her 11-year-old son Cody recently tried on last year's clothes and found that most fit. He'll still need a new book bag and a few pairs of new jeans. Lynch figures her back-to-school costs will total $150.

Take advantage of tax holidays, but stick to items you truly need. "I wouldn't go spend my brains out because I don't have to pay tax today. I would use it like a coupon," says Mary Hunt, founder of the newsletter Debt-Proof Living.

Marylanders are expected to save $5.5 million during the tax holiday running Aug. 23-27, meaning they will be spending a little over $100 million. The tax break applies to apparel items that cost $100 or less. But not all items in your closet would be tax-exempt. For instance, you can avoid sales tax on bowling shirts, bathrobes and corsets, but not on backpacks, book bags and purses. To check what items qualify, visit www.comp.state.md.us.

Spread purchases out over the year, instead of buying an entire year's worth of outfits up front. Besides, fall fashions are now full price but will be on sale in a few months - for a lot bigger discounts than 5 percent.

Don't charge school supplies if you won't be able to pay off the credit card when the bill arrives. Otherwise, the finance charges can wipe out any sales tax savings, Lynch said.

Lower-income households should contact the school to find out if there are local programs where businesses or other organizations donate school supplies.

Hunt says back-to-school is just another trumped-up holiday to get people to spend. She says she used to get caught up in the school frenzy. "I thought I could create the perfect school year for my kids by buying them stuff."

But after racking up more than $100,000 on credit cards - not just on school supplies - and nearly losing her home to foreclosure, Hunt spent 13 years paying off her debt. She now coaches others to do the same.

She advises parents to use this time to teach kids to withstand peer pressure to spend.

"Families can set their own agenda," she says.

Tell us your ideas for keeping back-to-school costs down by writing personal.finance@baltsun.com

eileen.ambrose@baltsun.com

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