Editors' pick: Originally published Nov. 18.
Holiday shoppers have one fatal flaw in their budgeting plan: their kids.
In one particularly discouraging holiday survey of 1,000 parents by financial firm T. Rowe price, many parents say they've overextended their finances to pick up every item on their kids' holiday wish lists. Even worse, 25% of parents have either taken from their 401(k)s or their emergency funds or taken a payday loan to cover holiday spending.
For some perspective on just how much money this ends up costing parents throughout the holiday season, the average amount spent on a child ages 8 to 14 was $422, with a median spend around $300. However, 34% of parents spent $500 or more on their 8 to 14 year old child. When 64% of parents say, "I spent more over the holidays than I should have," they mean that their kid accounts for more than a third of the $935.58 that the National Retail Federation says parents plan to spend during the holiday season for everything from gifts to decor and holiday dinner.
No one wants to be a Scrooge. "Between our inclination to be generous during the holiday season and the blockbuster retail deals, playing Santa can be kryptonite for even the savviest budgeters," says Marty Allenbaugh, a certified financial planner at T. Rowe Price, says, "But splurging a little shouldn't turn into indulgence at the expense of financial well-being."
In some cases, that's exactly what's happening. About 53% of parents say they "try to get everything on my kids' lists, no matter how much it costs." Meanwhile 58% of parents admit they "never stick to my holiday spending budget." While that's only less than ideal for the 68% of parents who save for the holidays throughout the year, it's a disaster for the 25% of parents who have, at some point, pulled from either their retirement account (11%) or emergency fund (14%) or taken a payday loan (11%) to cover holiday spending. Just as bad: the 16% of parents who take more than six months to pay off credit card bills from holiday shopping.
"Retirement accounts are meant to fund retirement, emergency funds are meant to fund emergencies, payday loans should be the last of last resorts," Allenbaugh says. "Nothing that comes wrapped in a ribbon is worth the consequence of bending these rules."
So what are the consequences of fudging these rules a bit. If you're a 35-year-old pulling from a 401(k) to cover $500 in holiday spending, Allenbaugh says you could be sacrificing nearly $6,000 at retirement. Fortunately, more frugal consumers seem to get the message. A survey from Bankrate.com found that two-thirds of consumers are limiting their spending this year. Most want to save more money (30%), but some cite stagnant income (25%), worries about the economy (15%) and having too much debt (10%) as a reason to pinch pennies. That said, a strengthening labor market means that very few shoppers (3%) say worries about job security are their reason for holding back on spending.
"With pay raises now spreading out among the broad population, Americans are finally limiting spending for a good purpose - to save money," says Greg McBride, senior financial analyst for Bankrate. "This is the first time in for years that the top reason wasn't stagnant income."
If you really want to get a better handle on holiday spending, Laurie Samay, a certified financial planner for Palisades Hudson in Scarsdale, N.Y.,says that it helps determine how much you can spend in total this holiday season. That should include often-overlooked expenses like postage, cards and wrapping pager. Once you have your overall budget, you should make a list of all of the people you'd like to buy gifts for and allocate a portion of your budget to each recipient.
"Curbing holiday spending is easier said than done unless you take a page out of Santa's book and make a list and check it twice," Samay says. "Be sure to stick to your list, and avoid allocating excess funds from one recipient to another in the course of your holiday shopping. That is a slippery slope to overspending."
Though most parents who use credit cards for holiday spending pay them off quickly -- 56% of all parents shop with credit cards, with 61% of that group paying off their holiday expenses within three months -- there are some who just can't make it work. Samay suggests that the latter group should limit itself to cash purchases, while the former should make that credit card usage work in their favor."If you use credit cards more responsibly, you should take advantage of the rewards you've been racking up throughout the year, like cash back" Samay says. "If your credit card doesn't have a cash-back feature, you can always turn to services like Ebates, an online shopping service that pays members cash back every time they shop, and provides them with coupons and deals."
The best idea is to get started on your holiday shopping early. As Samay notes, last-minute shoppers tend to rush through the process and pick more expensive versions of gifts than they could have found weeks earlier. The more time you allow yourself, the more flexibility you will have to shop around and look for better deals.
Consumers are increasingly figuring this out, with 41% telling the National Retail Federation that they started holiday shopping in October or earlier. of that group, 63% said they are trying to spread out their budgets.
"The holiday season doesn't have to be stressful," Samay says. "As with all other aspects of your financial life, planning and discipline pays off."