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Posted October 28, 2009 | comments Leave a comment

Debt proof your holidays

Holiday displays that appear in stores in early fall always bother me. It seems too soon to be thinking about December before I've enjoyed my Thanksgiving turkey! But one thing about the holidays never too early to discuss - your holiday spending plan.

PDF: Holiday spending plan
Every year towards the end of January, we get calls from a lot of people who have over-used their credit cards and now need the help of a credit counseling service to straighten out their finances. I encourage you to plan your holiday spending NOW, so that this time you can avoid the credit trap.

Only you can decide the amount you can afford to spend on the holidays. But I can almost guarantee that if you don't think about it in advance and set some limits, you will end up spending more than you intended. Unfortunately, many people think their spending limit is the maximum available credit on their credit cards. These people often end up with the post-holiday debt blues.

The solution is to create a holiday spending plan. First, take a good look at your family's normal income and expenses and think about how much is realistic to spend for the holidays. Recommendations from experts suggest holiday expenses should range from 1 to 5 percent of your net (take home) income. If your normal budget is tight, you'll want to stay on the lower end of that scale. But if you feel financially secure, with a stable job, emergency savings, retirement fund, and so on, you may be able to afford to be more liberal in your holiday spending. Either way, it is important to set a limit and stick to it.

If you must use credit, setting a limit is even more important. Plan on an amount no larger than what you can pay off in several months. You won't want to still be paying on this year's holiday expenses when holiday time rolls around next year. The interest on credit card charges can add up to hundreds of dollars, which is money that you would probably rather have in your wallet instead of the credit card company's pocket.

The next step in your holiday spending plan is looking at all of your holiday expenses. Expense categories can include buying gifts, gift wrapping, holiday greetings, postage and shipping, pictures, travel, decorating, baking, entertaining and more. Our holiday spending plan form has a column for you to estimate your expenses for each item.

But the chance is good that your expected expenses will exceed the amount you think you can afford. So, as all good financial managers do, you'll need to look at each item carefully to see where you can reduce your spending. Does Aunt Susie really need a $50 gift or could you find something special for $30 instead? Is it important that you mail greeting cards or could your holiday greetings be sent as postcards or even electronically? Asking yourself the hard questions about each line item can help bring your holiday spending plan in line with what you can actually afford.

Your spending plan is only useful if it helps you to stay within your limits. So many experts suggest that you do as Santa does, "make a list and check it twice." Take your list with you when you are shopping. Writing down the cost of each purchase can help motivate you to stay on track! Because you have planned ahead, you will be able to shop for items within your price range, look for bargains and sales, and reduce the temptation to spend beyond your limits. If you overspend in one area, you'll be able to easily see the need to cut back in another.

Even if your holiday spending plan isn't 100% effective this year, it is worth doing for another reason. Once you have written down everything you have spent, you will be able to plan ahead for the next year. Add up all of this year's actual expense amounts, divide by 12, and begin in January to deposit that amount into a savings account each month. The next year, you will have savings to pay for everything and your holidays will truly be "debt-proof"!

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