The holiday season is supposed to be the most wonderful time of the year. But spending more than you can afford on gifts, decorations and food can leave you in a serious post holiday slump, setting you up to spend most of the new year trying to get out of debt.
I spoke with certified financial educator and Founder of Money Basics Tamara Dervin to find out how you can set and stick to a holiday shopping budget that won’t leave you broke in the new year.
Start With a Budget
Before you start loading up your cart with gifts, Dervin suggests figuring out exactly what cash you have to spend. That should include money you’ve specifically earmarked for holiday shopping and any perks you’ve racked up from your credit cards.
“If you’re a rewards member of a credit card company and have accumulated miles or points, you can take advantage of those resources to enhance your holiday budget,” she said.
Make a List (And Check it Twice)
Once your budget is set, Dervin suggests making a list of all the holiday gifts you want to buy, including the costs. She cautions shoppers not to forget those ancillary expenses that always come up but often go overlooked.
“The other often-missed expenses people don’t include in their holiday budget are things like parties, decorations and Christmas dinner. That’s money we usually don’t spend throughout the year,” she said.
If you find that what you plan to spend is more than what you have on hand, Dervin says you’ll need to make some hard decisions and cut things that aren’t absolutely necessary.
Don’t Charge What You Can’t Afford
Interest rates are extremely high right now, so Dervin suggests using caution when paying for things with credit cards.
“The current interest rates are great for savers but bad for debt holders,” she said. ”If you look at the fine print, you see that interest is a variable rate. So right now, you could be looking at an average interest rate of 27 percent or higher.”
If you’re charging and just making minimum payments, you can end up in cycle of debt that is tough to escape.
“You’re not getting any savings if you get 10 to 15 percent off and you pay almost 30 percent in interest,” she said. “It’s going to compound, and you may end up paying double in the long run. And you definitely won’t have any joy in January.”
That Goes For Buy Now, Pay Later Too
When it comes to those “must have” gifts on your list, you may be tempted to use buy now, pay later services like Klarna and Affirm when you shop. But Dervin warns that doing so could be a costly mistake.
“There is danger in using those services,” she said. “Yes, they advertise it as interest free. But if you miss a payment, you will have to pay late fees. And if you’re using these services with multiple retailers and not keeping track of all of the payments, you could possibly send yourself into an overdraft situation which causes you more fees.”
There’s An App For That
If the idea of keeping track of your holiday spending seems just too overwhelming, Dervin suggests using a budgeting platform like EveryDollar or YouNeedABudget to help keep your spending in check. “I always tell people that budgeting is personal. You know if you are a paper and pen person, an Excel spreadsheet person, or if you need an app to help,” she said. “The most important thing is to figure out what tool works best for you.”