Come the holiday season, there's a mad rush to buy gifts for loved ones. Many consumers dive in head first in pursuit of the best deals for a PlayStation 4, Xbox One or iPad -- at the expense of a balanced budget.
Desperation breeds bad decisions, too. Brian Frederick, a CFP in Scottsdale, Ariz., has had clients who have faced penalties three times over because of their holiday shopping; they pulled money from their IRA accounts, and, so, "not only did they lose the future growth of that money, but they had to pay income tax and an early withdrawal penalty on it as well," Frederick says.
To avoid overspending, you have to be smart -- read on for more detail.
1. Make a list and stick to it.
The same principle applies to groceries: don't go to the supermarket hungry or else you'll buy a whole lot more than you intended. For holiday shopping, too, "make a list and stick to it," says Christina Povenmire, a CFP in Columbus, Ohio. "That way, you can look out for sales and take advantage of them instead of just going out and buying whatever you see for whoever pops in your head at the moment. Impulsive spending is a surefire way to blow your 'budget.'"
More than that, buy with cash, not credit. "Commit to only use cash when buying gifts," says Curt Sheldon, an EA in Alexandria, Va. "It will keep you on track and out of debt." Indeed, consumers spend 12 to 18 percent more when they use credit instead of cash, according to a study by Dun and Bradstreet.
2. Save with specific numbers in mind.
To budget successfully for the holidays, you should hone in on a specific number. "You need to start with an end in mind," says Jonathan Duong, a CFA in Denver. Duong expands on this notion of holiday shopping because it's a question relevant to your personal finances in general: "What financial goal are you trying to reach (e.g. saving for retirement, saving for your children's college, etc.)? How much time do you have left to save for it? What rate of return can you expect on your savings?"
Duong says that if you need to save $300 a month, for example, then you should have that amount automatically transferred every month to the appropriate account, whether it's a savings account, an IRA or 529 account.
3. Set up a comprehensive budget.
Mint.com is a popular app for budgeting, and it allows you to see all your bank accounts in one place with multiple views, from a simple list of expenses to a pie chart that breaks down your spending by category. And, according to Duong, it's relatively secure, too.
"Although you have to provide the user names and passwords for the accounts you want to track, Mint uses bank-level encryption," Duong says. "In addition, Mint provides 'view-only' access, meaning that you can't move money using the software."
In addition to being a secure app, Mint.com can help you reign in your holiday spending. In sum, throughout the entire year, you shouldn't spend more than 5 to 10 percent on giving, says Bonnie Sewell, a CFP in Leesburg, Va.
Spending right during the holidays is part of a larger question anyway: how much should you spend in general? Sewell recommends the following breakdown for smart spending:
- Savings - 20 percent of income
- Housing - 25 to 35 percent
- Utilities - 5 to 10 percent
- Car or Transportation - 10 to 15 percent
- Food - 10 to 15 percent
- Medical - 5 to 10 percent
- Entertainment - 5 to 7 percent
- Personal - 2 to 7 percent
- Giving - 5 to 10 percent
Consider why you give. Jeff Stoffer, a CFP in San Rafael, Calif., encourages his clients and readers to rethink going out to the malls on Black Friday and instead consider what giving really means:
When giving comes from a place of wanting to give, that is, not from a feeling of obligation, then suddenly the act becomes as much a gift to one's self as it is a gift to another person. I like to think of giving, and determining the amount that is appropriate to spend, in terms of the Buddhist concept of dana -- the cultivation of generosity, giving from the heart. This is not giving in the expectation of repayment in any sense, but getting in touch with the feeling of generosity and the meaning of a gift.
In short: don't give just because people give. Think about what the act really means, both from within and for your budget.
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