Let me say for the record that I hate rushing the holiday season – the appearance of Santa Claus in the stores as soon as the Halloween decorations are cleared out, hearing Christmas carols before the first snow has fallen, that kind of thing.
So why am I writing about holiday shopping when temperatures are still pushing 80 degrees at the end of September?
Well, I'm a great believer that people could better manage their finances if they did more planning ahead rather than simply reacting on the spur of the moment.
Since it is undeniable that holiday spending has a major impact on household finances (more on that in a moment), then it really isn't too early to do some planning on how to make more responsible holiday spending decisions this year.
Some hard facts about holiday spending
Why the urgency? Because the stakes are so high. According to the National Retail Federation, holiday season retail sales last year totaled $616.1 billion. When holiday sales are strong, it is generally reported as a sign of strength for the US economy. I would tend to agree if I thought people could actually afford what they are spending, but there is evidence to suggest that many cannot.
Figures from the Federal Reserve show that credit card debt outstanding jumped by more than $40 billion from September 30 to December 31 last year. A similar jump occurred in the year before that, when credit card debt outstanding increased by nearly $37 billion.
In fact, if you review the historical numbers, a troubling pattern emerges: During most of the year, Americans typically manage to pay down credit card debt, but they more than make up for it at the end of the year. As a result, credit card debt outstanding has been increasing over time.
Spend less, enjoy the holidays more
If January credit card bills tend to spoil your holiday afterglow, then consider these ways to spend less so you can enjoy the holidays more this year:
Measure what you spent last year. One reason holiday spending gets out of hand is that people lose track of it in the heat of the moment. You spend a little more on this person, feel obligated to buy a gift for someone who has invited you to a holiday party, and over the course of November and December you systematically destroy your budget, one credit card swipe at a time. The starting point for getting control of all this is to face the facts by figuring out how much you spent last holiday season. Another key piece of information to review is how much your credit card balances increased by the end of the year — that is a measure of how big a problem you left yourself with.
Think about whether or not you are happy with how you spent the money. Once you figure out how much you spent, review how you spent it. See whether there was a solid rhyme or reason to how much you spent on which people, or whether gifts for some were way out of proportion with the rest of your giving. Think about whether you shopped for the best deals on those gifts, or whether you felt rushed into buying at the first price you saw. Perhaps most importantly, think about if these were gifts that really met a need or brought joy to your friends and family, or whether they were things you chose because you couldn't think of what else to buy.
Create a detailed budget for this year. At this point, after reviewing what you spent and how you spent it last year, you should have a better idea of what you did right and what you did wrong. Now it is time to act on that knowledge. Start by figuring out how much you can spend without leaving yourself with more credit card debt. Then make a list of recipients and figure out how much to spend on each, based on who has been naughty or nice or whatever other criteria are important to you. A detailed budget is important, because, if you try a more general approach, you will inevitably remember someone else after you have already spent as much as you had planned to spend in total.
Early preparation lets you practice opportunistic shopping. Besides giving you time to do the planning described above, the real reason I wanted to write about this so early is that I am a great believer in opportunistic shopping — buying when you see a great price or a genuinely thoughtful gift, rather than the forced march through the mall that last-minute shopping represents.
Retail competition means early sales promotions. Another reason to make your gift-giving plans early is that retailers are increasingly trying to out-maneuver one another by offering early price promotions to capture consumer dollars before they can be spent anywhere else. Consumers who are ready to buy early can take maximum advantage of this trend.
Try making payments in reverse. How long did it take you to pay down your credit card balances after last holiday season? However long it took, think about making those payments in reverse this year — that is, over the same amount of time, start directing money into your savings account in advance of this holiday season. Granted, given the low level of today's savings account rates, you won't earn much on that money by saving up in advance, but you will save a lot by not paying double-digit interest rates on a credit card balance after the holiday.
Time can be more valuable than money. An alternative to physical gift-giving is to arrange to spend time with friends and relatives. For an example, arrange a small holiday dinner party where each guest is responsible for a course rather than everyone exchanging gifts. This should be cheaper, and the camaraderie you'll share is more in the holiday spirit than traipsing through the mall trying to find a gift for everybody.
Consider exchanging skills rather than gifts. Offer to cook someone dinner in exchange for baby-sitting services, or change someone's oil in exchange for getting your laundry done. It's cheaper, and each party will get something that's actually useful.
So really, even though I am committing the transgression of talking about the holidays well ahead of time, I haven't gone over to the dark side. You are about to be hit with a barrage of appeals to spend your money; I want you to be prepared to resist so that the new year can be as happy as the holiday season.
What do you do to stay within your holiday budget? How early do you start to plan?
Richard Barrington, CFA, is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc.