Setting a Smart Holiday Budget
The weather outside might be frightful, but your post-holiday debt doesn't have to be. Keep to a sensible holiday budget by planning ahead.
As the season’s first flurries make landfall and multi-colored lights begin dotting the trees, our minds turn to the holidays, and inevitably, holidayrelated shopping. With gift giving on everyone’s mind, this time of the year is when many fall into bad spending habits and rack up high-interest credit card debt that could take months or years to pay off. But experts say preparing for a financially sound holiday season should begin months before the decorations go up – in fact, planning for next year’s holidays should begin as soon as you begin taking the lights down.
Setting a Budget
“Many people are not thinking in terms of budget during the holidays,” says Colleen Cramlet, Senior Vice President and Regional Retail Sales Manager for First Midwest Bank. “They’re thinking more with their hearts and not with their heads.”
This willingness to buy from the heart causes many to shop without considering their bank accounts. But according to Cramlet, having a budget and keeping tabs of where you are financially will help you avoid financial disaster during the holidays while still allowing you to purchase meaningful gifts.
“A budget can put parameters around someone’s thought process,” she says. “With a budget you can still provide those gifts, but in a much more responsible way.”
Robin Thompson, President of Sterling Heights, MI-based Budget Wise Consulting, advises clients to start budgeting at the beginning of the year. She recommends people first identify their net income or take-home pay, and then subtract all monthly expenses such as a car payment, utility bills and mortgage payment. Next, factor in unplanned expenses. These include car repairs, vacations and even holiday shopping, which are often overlooked when setting up a budget, Thompson says.
“One of the next steps is to set goals. Outside of monthly expenses, figure out what you want to spend and when you want to spend it,” she says. “Based on that, you can figure out how much you should be saving each month.”
Once you have a figure in mind of how much you want to spend during the holidays and how much you can set aside each month, Thompson recommends setting up three bank accounts – your standard checking account and two savings accounts, one for emergency savings and the other for your nonmonthly expenses like holiday shopping. Once these savings accounts are established, money should be automatically deposited into them each month to meet your goals.
“From a banking perspective, people should set up a savings account where they can [put away] a certain amount of money that they can afford,” Cramlet says. “By planning ahead, they can be certain they have the dollars to spend when the holidays arrive.”
Sticking to It
Even with a budget in mind, it can be easy to splurge a little here and there, causing you to drastically go over budget in the end. To avoid this common misstep, Cramlet recommends creating a list of people you want to shop for and how much you want to spend on each gift, thus ensuring the total amount does not exceed your budget.
Thompson suggests avoiding credit card use and instead using debit cards or cash, along with the help of cash envelopes.
“After they’ve identified whom they’re shopping for and how much they will be spending, put the money in an envelope with the person’s name on it,” she says. “And when the money is gone, it’s gone.”
When shopping with your debit card, Thompson recommends using it in conjunction with cash envelopes as well. If you make a purchase using a debit card, immediately place the receipt in the envelope so you know the purchase did not exceed the amount you wanted to spend, she says.
“But, you should never use your debit card without a firm idea of a spending limit,” Thompson warns.
To avoid overspending, Cramlet also suggests shopping early to take advantage of the best deals. Although the majority of holiday shopping begins on the day after Thanksgiving, some shopping can be done throughout the year.
In addition, to alleviate impulse spending, Cramlet recommends window shopping first. “Look at the cost of things, and then do some comparison shopping,” she says. “Utilize what’s available on the Internet, and search for the best deals.” Comparison shopping can begin as early as January, she adds.
“If your budget doesn’t allow for as many purchases as you need, consider scaling back on purchasing altogether. Homemade gifts from the heart are sometimes more meaningful than gifts from the store,” Cramlet says.
Thompson offers gift solutions that revolve around baking, cooking, crafting or even just spending time with your loved ones.
“Have your family over and cook for them rather than purchase a gift for each sibling,” she says. “Or spend time doing something that you would not normally do – a gift of time is often bigger than money.”
Purchasing a membership to a museum or tickets to a charity event are also great gift ideas because they not only express the recipient’s individuality and interests, but can be tax-deductible as well. Other alternative gift ideas include a bound book of family recipes or a photo album.
Not Just Gift Giving
When setting aside money for a holiday budget, many people tend to forget the other expenses associated with the holidays, such as travel and holiday parties. These expenses should be explored in detail and then addressed in your budget.
“It’s really thinking about the total cost of an event,” Thompson says. “Take travel for instance – not only do you have to consider the costs of travel like plane tickets and hotel, but other factors such as food, entertainment, gifts, cab fare and tips.”
Thompson tells clients to map out every event where they will be spending money and look from every angle at what the total cost will be.
To help keep costs low, Thompson recommends searching for travel deals early. When it comes to hosting holiday gatherings, create a menu so people can sign up to bring a dish.
Scaling Back, But Not From the Heart
“The word ‘budget’ often invokes a feeling of being deprived,” Thompson says. “But the best controls are not around what they spend their money on, but how they spend. Part of the fun is still looking around and searching for the perfect gift.”
Cramlet agrees. “You don’t have to take the emotion out of gift-giving. You can still buy a thoughtful gift while keeping within your budget.”
In the end, a budget and planning ahead is all it takes to ensure the holidays remain financially stressfree so you can focus on the more important things – food, fun, family and friends.