‘Tis the Season: 5 Ways to Avoid Holiday Overspending
Prepare for the holiday season by planning and budgeting ahead of time.
With the holiday season quickly approaching, many Americans are bracing themselves for the impact of the most expensive holiday. Preparing for the holidays should entail planning and budgeting throughout the year so that the season doesn’t completely ruin financial plans. However, only about half of Americans set a holiday budget. This leads to overspending and mislead financial planning. According to Kirk Jewell, a certified financial planner and founder of Global Financial Services, no more than 1% of total household income should be spent on Christmas. Many Americans do not realize just how much they spend over the holidays and are left with a huge credit card bill come January and no way to pay it.
Overspending is a huge problem among Americans. Even those who consider themselves to be financially savvy and secure often find themselves spending more than they think. According to a new study, the answers to why people overspend could be more psychological than was once thought. Scientists have discovered that people’s mental wiring is great at forecasting future income and horrible at forecasting future expenses. We are a money driven society, often thinking about how much money we do or will have and what we can buy with it and not accounting for inflation, emergency expenses, and future monetary obligations, such as the holidays. According to the Wall Street Journal, a study from 2008 concluded that Americans oversimplify expenses and exaggerate the impact of their income. For example, a person making $30,000 a year living in a town paying $800 a month for apartment rent and $10 per day for a meal is likely to take a job in New York City paying $60,000 a year because they only consider the salary raise and not the expenses that come along with moving and the increased cost of living.
Another reason Americans find themselves in a pile a debt is because they give their savings more value than using credit or borrowing money. In a study conducted by the University of Chicago Booth School of Business, researchers found that people feel more financially sound when their savings accounts are high, even if that means increasing their credit card debt or borrowing money at high interest rates. Further, the study showed that people are more likely to borrow money at a 10% interest rate rather than dig into their savings accounting that earns a whopping 1%. This isn’t to say that having savings is bad, but the pros and cons of dipping into savings verses borrowing money need to be thoroughly examined before reaching a decision.
Other psychological reasons for over spending include mood, how one measures and views willpower, and how people value their assets. In 2012, a Dutch study confirmed that unhappy people were more likely to spend more and have less control over their expenses. Happy, more content people tend to spend less and have more control over the money coming out of their account. In a 2015 Stanford University study, researchers found that people who view willpower as a limited resource are likely to reward themselves when they get through a stressful situation because they think they went above and beyond and deserve a special treat for working hard. Individuals who view willpower as a limitless resource are more likely to view stressful situations as part of life and do not feel they deserve a reward for getting through a stressful day. How people interpret the value of asset also affects spending. If housing prices go up, homeowners could think that they are wealthier because the value of their asset increases. Although this is true to extent, the increased value of an asset does not equal liquid income. A homeowner cannot spend the increased value of their house because the increase is not liquid, it is simply appreciated value.
While the holidays feel like a time for rewarding ourselves and treating our loved ones, we need to remain financially conscious and try to plan ahead the best we can. These 5 tips can help you avoid overspending during the holidays:
- Create an Explicit Budget for the holiday season. An explicit budget is a budget that is “stated clearly and in detail, leaving no room for confusion or doubt,” according to Oxford Dictionary. Have precise limits on how much you can spend on gifts, food, travel, etc.
- Be honest about your spending. This is a huge problem for people who tend to justify their spending. Make lists of your need and your wants and don’t come up with reasons why some “wants” are “needs” during stressful times.
- Go only to stores that sell what you need. If you need groceries for a family dinner, just go to the grocery store. Try to avoid malls or other big shopping centers.
- Assess your mood and don’t go shopping if you’re grumpy, sad, or stressed.
- Think of the opportunity cost. Think about what you could use that money for instead. If you’ve been wanting a new outfit, think of what you could buy if you saved for a month. If you like traveling, think of the places you could go if you saved for a year. If you would like to retire early, think of how soon you could retire if you saved for the next 10 years.