Even if you’re generally careful with your spending most of the year, it is dangerously easy to fall into the trap of overspending during the holidays. You’re busier than ever. Family, work, and social obligations feel overwhelming. No wonder many of us let our usual prudent money habits go out the window. It’s a mistake that’s very easy to justify: we’re caught up in the holiday spirit; this only happens once a year; our family and friends deserve to know we love them. The pressure is on, so restraint be damned.
If this holiday overspending scenario feels familiar, you’re certainly not alone. According to Holidays, Money, and Family, a new survey by T. Rowe Price, many families fall into no-holds-barred spending during the holidays that often results in post-holiday buyer’s remorse.
Here are a few sobering findings from the survey:
- 53% of parents agree with the statement: “I try to get everything on my kids’ lists, no matter how much it costs.”
- The average amount spent on a child ages 8–14 was $422 (median: $300). 34% of parents spent $500 or more on their 8- to 14-year-old child.
- 58% of parents agree with the statement, “I never stick to my holiday spending budget.”
- 64% of parents believe that they spend more money on the holidays than they should have.
- 25% of parents have at one point in their parenting life taken money out of their retirement account to pay for holiday spending.
Getting so caught up in the madness of holiday gift-buying that we lose control of our spending is easy, but not inevitable. This year, if you want to avoid a raging case of post-holiday buyer’s remorse and a pile of credit card debt that you’ll be paying off for months to come, resolve to follow these simple guidelines.
1. Calculate how much you can really afford to spend, TOTAL. As the T. Rowe Price survey bears out, many of us make holiday spending decisions based on what we think we “must” spend, rather than on what we can truly afford. But simply having a realistic, firm number in mind goes a long way to keeping you mindful and holding your spending in check. So how do you know what the magic number is for you? Here’s a rule of thumb. Most people should allocate no more than 1.5% of their income for holiday expenses. So if you make $50,000 a year, this means your holiday budget is $750.Keep in mind that this figure covers everything, not just gifts. Big ticket items such as travel expenses should fit within this budget and smaller expenses like holiday decorating or special dinners out should be factored in as well.
Having your bottom-line spending cap in mind as you race through your holiday shopping and festivities will help, but let’s be honest. When you’re in the moment, faced with “sales” or a beloved child’s holiday wish list, keeping your resolve won’t be easy. This is the most dangerous time. You’ll be distracted, rushed, and more likely than usual to make impulsive decisions. So, what else can you do to brace yourself for the pressure?
2. Break it down. Knowing your total budget is one thing, but you also need to set spending maximums for specific items on your list. Work backwards from your overall budget and plan how much you are spending on each person. Prioritize as needed; if you know airfare is a necessary expense, you may need to reduce your spending on individual gifts. And if you think this takes the “spirit” out of things, remember that sick feeling you’ll have in late December when you realize that you’ve spent too much. Don’t let worry about disappointing your family force you into spending decisions you’ll regret. Instead, share your thinking about the budget with your family beforehand so that you have support for the decisions and choices you’ll be making.
3. Start as early as possible so you can swap time for money in your holiday gifting. We all know those thoughtful, homemade gifts and efforts are very special, but they take time, both time to plan and time to implement each project. Think back to your own favorite holiday gifts for inspiration. One of my own favorite gifts was one I received last season: a fabulous homemade bottle of eggnog, made with a local whiskey, with the recipe attached on a cute card. Lots of love went into that, and the eggnog beat the heck out of what is available at retail. I gave sips in little shot glasses to all my guests over the holidays, so that gift kept on giving.
4. Go in to the holidays with an updated calculation for your emergency fund. Remember, this is your cushion for unexpected expenses and should be six months’ worth of expenses held in a readily-accessible account. Many of us will hit this fund for holiday spending, which is fine as long as we build it right back up again after the holidays. Tap your emergency fund for holiday spending only to the extent that you know you will be able to replenish it right away.
One final thought: Holiday spending doesn’t happen in a vacuum. Yes, this is a special time of year. And it’s tempting to suspend our usual rules and think – just like calories on vacation – that holiday spending doesn’t matter. But the truth is, the decisions you make this season will impact your overall financial picture. Following these guidelines won’t necessarily be easy, but the effort in self-discipline will be worth what you save yourself in stress later. Enjoy the holidays, knowing you’re making spending decisions that will allow you to sleep comfortably at night, long after the last shot of eggnog has been drunk!