Even with the economy in a recession, people want to celebrate the winter holidays. For some, the holidays are an excuse to veer from a budget. In good times, the damaged from doing so can be repaired in the following months with a bit of effort. However, trying to undo the hurt from overspending over the holidays will be a lot harder in 2009.
Here are some common financial mistakes people make during the holidays and how you can avoid them.
Giving gifts that require extra expenditures. Many gifts come with costs that go beyond their purchase price. If you buy your kids that fancy new phone, there is going to be a phone bill every month. If you buy the latest video-game console, it won't be long before the kids want new games. A recession is a time during which you want to limit expenses, not add more. Eliminating gifts that come with added expenses can be the difference between staying above water and sinking into debt next year.
Using emergency funds. When money is tight, some people reach into their emergency fund to help tide them over. Knowing this, they feel comfortable that they will be able to replenish the emergency fund in the first few months of the new year. This may work when the economy is strong, but in a recession, it's a risky move.
No matter how tight money may be, holiday gifts, parties and other related expenses are not emergencies. An emergency fund ought to be full during a recession because that is when it's most likely to be needed. A smart move would be to add to it.
Having one last fling. People know things are bad and they are likely to get worse next year. Some take it as a sign they should have one last roaring fun time because they probably won't have the opportunity to do so again for a long time. The longer you delay the reality that what you spend will need to be paid back, the worse the pain will be. While that carefree attitude may seem fun in the moment, it will be followed by many months of stress when you face up to overspending.
Putting the holidays on credit cards. Credit cards are a convenient way to pay for the holidays when finances are tough, but they're expensive. Credit cards should be thought of as a last defense to be used only after your emergency fund is depleted.
There is no good excuse to add credit card debt when the economy is in bad shape, and that includes celebrating the holiday season. You should instead try to pay down any balance and tuck away the cards for better times.
Pretending nothing is wrong. Some people try to hide financial problems from family and friends by pretending nothing is wrong. To keep up this facade, they shop like they would when the economy is great. You can pretend all you want, but you are eventually going to have to come clean. The longer you wait, the more difficult it will be for everyone.
The sooner everyone in the family knows, the sooner you can work together as a family to get your finances in a stronger position. By admitting that things are tough and the holidays may need to be a bit leaner than they have in the past, you are taking positive steps to address what needs to be done.
Assuming you're immune. Some people believe they can ignore a recession because they work in an industry that is less vulnerable than others or they think they are indispensable to their employer. Nobody is completely immune during a recession, and you should be planning the holidays with that in mind. It's far easier to find you were overly cautious in your financial planning than not.
There are plenty of ways to have a good time this holiday season without spending a lot. Noting the common spending pitfalls and remembering that the memories people value most can't be bought, you may find that this holiday season is much more fun without all the spending.