Plan Ahead to Avoid a Financial Holiday Hangover
Does this scenario sound familiar? You use credit cards to do your holiday shopping, promising yourself you’ll pay the debt off within two or three months. Six or eight months later (or more), you’re still paying, and those items that seemed like such bargains end up costing you 10 to 20% more than you thought thanks to the credit card interest.
For many Americans, this debt pattern is repeated year after year. Personal finance experts call this the “holiday hangover.” There are times when incurring credit card debt makes sense, but holiday gift-buying is not one of them. Using credit cards often leads to impulse spending, overspending, and increased debt.
A better approach is to save small amounts of money throughout the year in a special holiday gift fund. Make a list of all the people you’d like to give gifts to and how much you can afford to spend on each one, and then pay cash from the savings you’ve built up. When the cash is gone, you’re done shopping.
If you find it difficult to save money throughout the year you can join an old-fashioned Christmas Club, still offered by smaller community banks and credit unions. You put a small amount of money which is often deducted automatically from your paycheck, into a special Christmas Club account at your bank. The account usually earns interest at the regular savings account rate. In October, November, or December, the money gets transferred to your regular checking account and you’re ready to go shopping!
Don’t have a Christmas Club account where you bank? Don’t worry, it’s just as easy to create your own. If you want, you can simply open a new savings account at the bank and use that as your own Christmas Club account. You can set up direct deposit from your paycheck to fund the account or set up a recurring automatic money transfer into the account. But keeping the money in an easily accessible account at your bank can be tempting to dip into when money gets tight, so you might want to open a separate online savings account. By doing so you’re going to earn a little more interest and hopefully keep the money out of sight so it’s a little less tempting to tap into.
How to Avoid A Financial Holiday Hangover This Year
Here are four simple steps to help you stay out of debt this holiday season and avoid that financial holiday hangover.
1. Set spending limits.
Look at your monthly budget and figure out how much you can realistically afford to set aside towards holiday gift giving without going into debt. Your intentions may be good, but the reality is that most people have a depressing amount of debt after the holidays and are not able to pay it off in as timely a manner as they had hoped.
2. Make a list.
Follow Santa’s example. Make a list of all the people you need or want to buy gifts for, including small gifts for babysitters, teachers, newspaper deliverers, etc. These small gifts can add up and are often the cause of going over your gift budget. Include money you’ll spend on Christmas cards, postage, holiday parties, decorations, holiday entertainment, etc. Just like budgeting your household expenses, you need to budget for all of your holiday expenses.
3. Set a limit.
Decide how much you will spend on each person on your gift list, then add everything up and make sure it doesn’t exceed your overall spending limit. Try to allow a cushion for unexpected items or price fluctuations, but be firm on your limit. Sure, you might come across a last-minute gift you just need to have, but if you don’t stick to the limit the whole exercise is worthless.
4. Decide where to shop.
As important as deciding what you’re going to buy is deciding where you’re going to buy it. If you don’t wait until the last minute, you’ll have time to comparison shop. Prices fluctuate significantly from store to store and from one month to another. Stores start cutting prices 10 to 25% on holiday items like decorations, gifts, and winter clothing the week before Thanksgiving.. As Christmas approaches, some items are marked down as much as 40% but selections are limited. You’ll need to decide whether price or selection is more important to you and time your shopping accordingly.
Don’t neglect online retailers. Online shopping is very popular these days and there are plenty of deals to be found. In many cases you can even find low prices with free shipping. What’s better than taking care of your holiday shopping from the comfort of your home instead of fighting the crowds?
Follow these simple steps and you’ll avoid the nagging feeling that you’ve overspent on Christmas or other holiday gifts. You’ll also avoid the struggle to pay off the credit card bills for months to come. Instead you’ll feel in control and free of the dreaded financial holiday hangover.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Holiday Hangover, well said! Your comments about leaving the holidays in debt are spot on. It’s ironic- we all are looking for bargains, but if you purchase an item on a credit card where you are carrying a balance, the cost of that item effectively doubles if you carry the balance for 5 years at typical credit card interest rates. The $100 sweater you were so psyched to get for $80 because of a sale, actually ends up costing $160 when you add in the accrued interest. If you have credit card debt don’t forget gifts from the heart- homemade items or personal services like babysitting or help or assistance that a loved one might value more than another tie or picture frame. Frankly, after this year’s economic challenges I doubt people are expecting this to be a very extravagant gift year.
Last year, I splurged on people's gifts and I didn't really take into account how much I was spending until after I saw my bank account when the holiday season was over. This year, I'm already making a Christmas list so that I can shop for some people earlier and hopefully find better deals while finishing up the christmas shopping earlier ! =)
I completely agree with making a list. If you click on my name, it will take you to a site where you can print free budget worksheets for the holidays. The worksheets cover everything from presents to meal planning to holiday attire. All the little extras always seem to be forgotten about and they really take a big chunk out of your budget.
Credit Cards are the most devilish things out there. They really lure you into a false sense of security, and unfortunately you tend to use them when you really can afford the least to. My solution is simple, just don't ahve them, but few paople have that luxury. Good luck with your spending and a happy festive season to you all, folks!
You have suggested some good points here to avoid financial holiday hangover. I believe in maintaining a separate account for year ending holiday and shopping expenses. I have never faced any financial trouble later by this way. I think it is a brilliant way to avoid financial crisis later after enjoyment.
My wife and I use the reward points from our AmEx charge card and cash them in for gift certificates to our friends' favorite stores and restaurants. It is an easy, painless way to help our Christmas gift budget.
Budget but look for gifts all year long. You may find the perfect thing at an artist's fair in June or a thrift shop in Sept (as in the 6 antique cameras I picked up for my photographer brother for $20.00)
Also set up a 'gift pantry' of little gifts that you can pick up on sale (like coffee mugs that can be filled with candy) for co-workers or last minute unexpected gifts. The pantry system can also work well for other gift giving needs too such as a birthday, graduation, anniversary or wedding. (I first read about this in a book titled Frugal Luxuries in the 1990s and found it works really well.)
Know who you are getting gifts for and roughly how much you are spending on each. Once you have that limit the rest should be easy. Don't go into debt just for gifts, try different types of gifts instead then.
this is always such a problem on january 2nd. Luckily i got this covered this year and i am not planning a repeat of last year's hangovers that lasted months. Am wiser now when it comes to finances than i was