Holiday Spending

The holidays are a time to celebrate with family and friends, enjoy some good food and drink, and exchange gifts. Well, in 2020, you may be scratching some of your normal activities off the list. Regardless, holidays tend to be a trying time for most of our budgets. According to the National Retail Federation (via USA Today), the average American spends about $1,000 during the holidays. Even worse, MagnifyMoney's debt survey after the 2019-2020 holiday season shows Americans added $1,325 in new debt! Taking both those numbers at face value, Americans are not only spending a great deal of their income, but are not able to pay for their holiday splurges. Considering both studies show this spending and debt is on the rise, and this problem is getting worse. For this week's blog, I want to help you celebrate the holiday season without the financial pain that follows.

Meet Rory, Mr. July in the Cats of Columbus County calendar!

Budgets and Financial Plans

The absolutely best way to avoid the holiday headaches is to have an accurate budget and financial plan to reflect holiday spending. As I've advocated in my previous series, if you can accurately reflect changes in spending during the holidays, you may be able to get ahead of it and adjust accordingly. You may confirm you're in a position to take on the additional expense and no further action is needed. On the other hand, if you find you're projecting a shortfall, you have time to adjust (cut other spending, or pick up after your neighbor's dogs for money).

Let's get into some actual numbers. Since we are talking about the average American, let's use the spending ($1,000) and debt ($1,325) averages from above. The median American household income is $68,703. Yes, I know "median" is different from "average", but let me have this - it's the holidays! The 2019 U.S. homeownership rate is 65.1%, let's assume this household has a home (and mortgage). Both parents - Terrance and Denise - have equal take-home pay to make up the household income, and they have two small children, including one in daycare. They are slowly funding an emergency fund and have relatively high credit card expenses.

As you can see, this family has very little in savings after all expenses, just $243 in December. If they are taking on the $1,325 in debt during the holidays, it's unlikely they will be able to pay this off for a long time without adjusting their other spending. So let's help these fine Americans cut some spending! The mortgage is key to long-term wealth, so short of refinancing for a lower monthly payment (without resetting terms), let's leave that as-is. Child expenses are probably necessary to enable them to work. Considering how little disposable income is left over, an emergency fund it critical to insulate against unexpected expenses... and holiday spending would not qualify as an emergency. The most practical target here is the credit card expenses. Cutting back on meals out (or delivery/takeout), reducing recurring subscriptions, or other discretionary spending should be priorities. In the chart below, I've reduced the credit card spending by just $100/month.

Notice that the family now has $1,443 by the end of the year, enough to cover the average holiday season debt! Of course, it's easy math on paper, but the real work is the daily decisions to reduce expenses and build up the savings.

Travel Savings

One of the biggest expenses around the holidays is travel. Flights, hotels, etc. tend to be more expensive around holidays to coincide with demand. My first tip is to book far in advance. Prices tend to go up as seats and rooms get gobbled up, and the last-minute deals sometimes available other times during the year are highly unlikely. Of course, this helps with financial planning as well. My second tip is considering traveling off-peak. For example, my relatives live in other states, so travel on the actual holidays is costly (and stressful!). We started celebrating "Thanksmas" a few years ago, where we either travel to relatives or host between Thanksgiving and Christmas. We still do a big, fancy meal, gifts and other traditions as if it were spent on a major holiday. While it's on pause this year due to COVID, it is something we've all found to be a great compromise for both our budgets and convenience.

Gifts

I can't write about holiday spending without covering gifts! Personally, this is one of the most stressful parts of the holidays. Finding the right gift for family, friends, or co-workers can be incredibly difficult. You want it to be personal, practical, and memorable. But, let's be honest... we can't always spend what we want on everyone, and where do you draw the line? Second cousin Roger? Kathy, your friend that you haven't seen in a year? Gabe, the awkward engineer three cubicles down from you with a Cats of Columbus County calendar? That's really more of a personal choice, and I think the only social obligation for these fringe folks is reciprocating for a gift received. Regardless of how many people you buy for, I highly suggested building in a gift budget as part of your financial planning around the holidays. If you do have to factor in an extra gift because Gabe hooked you up with the 2021 CCC calendar with a moody Tabby on the front, you simply revise down the cost of gifts you're getting Roger and Kathy.

How much do you spend? Well, at the full risk of being cheesy, it's not how much you spend... it's how much it means. Studies show that the more spent on a gift does not equate to a greater sentiment from the recipient. Gifts with a personal connection, either a shared interest or something you know the person will use goes a long way. What about home-made gifts? Most likely budget-friendly and personal, crafting a gift for someone special is a wonderful way to express your appreciation.

Holidays are a wonderful time for sharing time, food, drinks, and gifts with the people in your life. But, without proper financial planning, you could have a major holiday hangover from spending more than you can afford. If you plan ahead and consider alternative ways to celebrate, and you'll be in much better shape after the fact. However you choose to spend this and future holiday seasons, be safe and healthy!