Planning Key to Spending Holidays Within Your Means

We’re in the midst of the annual year-end shopping season, and millions of Americans are grabbing their gift lists and heading off to the mall.

Unfortunately, many of them are also headed for financial trouble.

The combination of ready credit and traditional holiday generosity creates a slippery slope for many families, especially those who have been living from paycheck to paycheck earlier in the year. Many find it somehow unseemly to worry about budgets and spending limits in the season of giving, but financial experts know from sad experience that those who fail to plan are those most likely to end up with money problems in January.

Holidays are expensive. A survey for Intuit Inc., makers of the Quicken financial software, indicates that the average person will spend more than $1,000 this season--$1,023 for men and $986 for women. The average for people in the prime child-rearing ages of 35 to 44 is $1,117.

Most Shoppers Go Over Budget

In addition, the survey found that 60% have not set a holiday budget, and another 12% have set a budget but expect to overspend it.

Another study by the American Bankers Assn. elicited somewhat similar numbers and the answers in both that poll and the Intuit survey reflected what studies have found in the past: Many people spend more than they think they will on holiday shopping.

Credit cards will account for much of that spending. During the 28 days between Thanksgiving and Christmas Eve, consumers will rack up roughly $97 billion in transactions on their credit cards, compared with $13 billion for debit cards, according to projections by CardWeb Inc. of Gettysburg, Pa.

The good news is that more than $80 billion of the credit card charges will be paid off by the end of January. The bad news is that will leave another $15 billion to $20 billion to go on top of the more than $500 billion that Americans already owe on their credit cards, CardWeb estimates.

And credit cards encourage spending. Industry and other studies show that in almost every context, the average credit card “ticket” is larger than that for cash or debit card sales.

There is nothing wrong with credit cards, but they require more self-control than cash, and self-control is toughest at holiday time. Holiday spending “is one area that can easily get away from you. With the prices out there today, you can easily get caught up in the spirit of things” and get into trouble, said financial planner David Dondero of Dondero & Associates in Alexandria, Va.

But there are ways to steer clear of trouble without sacrificing too much in the way of holiday spirit, most experts agree. The key elements are planning--make sure everyone on your list is covered but at a level you can afford--and staying away from credit cards, to minimize impulse buying.

Financial planner Ric Edelman of Edelman Financial Services in Fairfax, Va., offers this strategy for getting through the holidays with both your relationships and your finances intact.

First, make a list of all the people you need to buy gifts for. Then next to each name, write the amount of money you plan to spend on that person--not what you plan to get them.

“A lot of people make a big mistake,” Edelman said. “They don’t write down the money; they write down the item. But suppose you decide to get Aunt Mary a sweater, and the sweater turns out to cost $65 instead of $25. People feel obligated to spend it--and you end up going over your budget.”

Second, add up the amounts you have on your list to get a grand total. If it’s too much, you have to go back and adjust the amounts, or knock somebody off the list. Then repeat the process until you get a total you can live with.

Third, go to the bank and draw out that amount of cash. “That’s the amount you take to the mall and when you’ve spent all of it, you’re done,” Edelman said. “You have be very careful or the last person on your list will get a lollipop.”

This system not only keeps you within your spending limit, it pressures you to do some advance thinking about how to stretch your allotment for each person to get the best present.

This can mean looking hard for discounts or other ways to make each dollar go farther.

Picking a Name Out of a Hat

Dondero noted that large groups sometimes draw names out of a hat “so everybody gets a present but everybody is not buying for everybody else.”

He also suggested pooling funds, “like a couple of brothers buying something for a sister. Pool your money and buy something really nice, instead of some cheap thing nobody wants.”

The final step, whether you use Edelman’s system or some other, is to begin thinking about next year--and budgeting.

“People this time of year always have a sense of horror at the discovery they have to spend money this holiday season--as if this never happened before,” Edelman said.

“A lot of people use their credit cards to get them through the holidays and spend the next eight months paying off that debt. Then just as they get it paid off the holidays come up again. They get into this vicious cycle because they aren’t planning effectively.”

When you finish your shopping, sit down with your credit card receipts, checkbook and any other records you have and look at what you spent. Think about next year: Are you likely to spend about the same amount? Do you have any big-ticket items coming up, like expensive bicycles for the kids?

Work out the amount, divide by 12, and start putting that sum aside each month.

One easy way to do this is to set up a bank or credit union account and have that much deposited automatically by your employer or swept into it by the bank.

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Making a List

Planning is a key strategy in keeping holiday spending in check. Here are some tips:

* List the people you need to buy gifts for. Write the amount of money you plan to spend on that person next to his or her name.

* Add up the amounts. If it’s too much, adjust them down or delete someone from the list. Repeat until you get a total you can live with.

* Go to the bank, and withdraw that amount in cash. Use the cash at the mall. When you’ve run out of cash, quit shopping.

* Start thinking about next year--and budgeting. Work out the total, divide by 12, and start putting that sum aside each month.