5 tips to take your holiday spending from frightening to affordable
Is your holiday spending budget in place? If you’re like most American retail shoppers, it may be far more than you anticipate. In 2017, Black Friday and Cyber Monday set records for online shopping, with $11.6 billion in sales over the holiday weekend, according to AllianceData. What’s more, the loyalty marketing solutions provider believes 2018 is on track to surpass 2017’s year-end, record-setting holiday sales. The firm’s 2018 Holiday Retail Outlook report¹ indicates that the retail sector is forecast to open 5,000 net new stores in 2018 and total retail spending is projected to increase by approximately 4 percent. In other words, Americans will spend an even greater share of disposable income this holiday season on gifts, household items, clothing, appliances, electronics and more. But, how Americans plan to pay for their increased holiday spending is where it gets a little scary.
In January 2018, MagnifyMoney’s annual post-holiday debt survey² reported that Americans racked up an average of $1,054 of debt over the 2017 holiday period, about 5 percent more than in 2016. While that may not sound alarming on the surface, it’s important to view it in context. Only half of those surveyed said they planned to pay off their holiday-induced debt in three months or less. Of the remaining half, 29 percent said they would need five months or more. What does that mean in dollars and cents? For a shopper making a minimum payment of $25 a month on a $1,054 tab, it would take until 2023 to pay down the balance — and they’d also be coughing up $500 in interest over that time (assuming an APR of 15.9 percent), based on MagnifyMoney’s calculations.
Here’s where things take a frightening turn. At the same time that consumers are increasing debt, they’re saving less of their income than before the recession, according to the U.S. Bureau of Economic Analysis³. A recent Bankrate4 survey supports this claim, reporting that more than a third of Americans don’t have a savings account at all, and among those that do, only 39 percent said they could pay for a $1,000 expense out of their savings, while 44 percent said they couldn’t pay for a $400 expense with cash.
At the crux of the problem is that 74 percent of Americans said they failed to budget properly for the holidays in 2017 , based on a separate survey from mobile-banking start-up, Varo Money5. The good news: there are ways to rein in spending and avoid breaking the bank this holiday season. No matter your income level or budget, the following steps can help you put a plan in place now to curb unanticipated spending and avoid adding new debt this holiday season:
- Create a holiday spending budget based on what you can actually afford. (To get started, see our budget tips below.)
- Begin setting money aside now in a designated holiday savings account.
- Shop early to avoid overspending on last-minute gifts and shipping charges.
- Talk to friends and family members about setting dollar limits on gifts; they may be as relieved as you to keep spending within reason.
- Get creative. In lieu of exchanging gifts give the gift of time together to create memories that last. Maybe that’s making a date to visit a local museum, hike in a local park, or spend time volunteering for a cause you and your friends or family members support during the holiday season.
The following tips can help you keep the momentum going throughout the year by creating alignment between your spending and savings habits and your life goals.
- Maintain a budget at every stage of life. Budgeting provides a clear and consistent picture of your cash flow—what’s coming in vs. what’s going out. Without it, you can’t optimize savings and spending, pursue your personal and financial goals with confidence, or seize important opportunities to grow your wealth. Make savings a prominent and permanent part of your budget.
- Evaluate your spending needs versus wants. Unchecked spending is the leading cause of budgeting gone awry. That’s why it’s important to sit down with your spouse, partner and/or other family members to determine your spending priorities. Fixed expenses like housing, food, clothing, utilities, transportation, childcare and ongoing medical expenses come first. These are necessities. Entertainment, shopping and hobbies—your discretionary spending—should be prioritized to prevent overspending. Make sure all interested parties have a fair say in prioritizing discretionary spending to avoid creating resentment.
- Identify and prioritize your goals. It’s tough to prioritize spending if you haven’t taken the time to identify and prioritize your financial goals. While goals like saving for retirement, a down payment on a home or a child’s college education may immediately come to mind—a comprehensive approach to planning goes well beyond these objectives to include the things that bring true purpose and joy to your life. In fact, one of the first things an experienced wealth advisor will ask you about is your lifestyle, not your net worth or portfolio holdings. Why? Because identifying the full range of your goals and putting a well-coordinated strategy in place to pursue them leads to a higher probability of success.
- Pay yourself first. Have you ever thought, “I deserve this,” when spending money on something outside of your budget, only to regret it later? Paying yourself first is not only something you truly deserve, but a behavior you’ll never regret. That’s because paying yourself first forces you to think beyond instant gratification and strive for delayed gratification: the fulfillment of your short and long-term life goals—your true priorities in life.
- Adopt a positive attitude about money. Money creates freedom, it doesn’t restrict it. Pursuing financial independence requires embracing financial management, which includes becoming familiar with basic financial terms and principles. And it isn’t as complicated as many people think—especially if you’re working with an experienced advisor.
Preparing for the holidays doesn’t have to be a terrifying exercise that returns from dead every year. If you set a reasonable budget and avoid racking up debt, you can still show your loved ones you care, while also protecting your financial future.