Financial Literacy

The holidays are often called the most wonderful time of the year. But for many, they can also be the most stressful - especially when managing money. The pressure to buy gifts, host gatherings, and travel can quickly add up, leaving your budget stretched thin and your financial stress levels high. In fact, according to a recent survey, nearly 60% of Americans feel stressed about holiday spending.

The result? Many people face credit card debt and struggle to recover well into the new year. By some estimates, over half of shoppers incur credit card debt from holiday spending, and nearly one-third still need to repay that debt nine months later.

But it doesn't have to be this way. With some thoughtful planning, you can enjoy the holidays without letting financial worries take over. This week, we'll explore holiday spending and budgeting strategies designed to help you manage your money more effectively, reduce stress, and still celebrate in style.

Here's a peek at what we'll cover this week:

The Psychology of Holiday Spending

Feelings often drive spending. And emotions like stress, excitement, and even loneliness can influence how much you spend. Retailers know it, too. And they use marketing techniques that sometimes encourage impulse buys. So, we'll break down the psychological triggers that drive holiday spending and offer tips to help you stay mindful of your spending habits. You'll gain insights into how to avoid the traps that lead to overspending (and how to make more intentional financial choices).

Hidden Holiday Expenses

It's not just gifts and travel costs that can add up - little-considered expenses, including interest charges and up-sells when shopping, can add up quickly. So, we'll highlight these often-forgotten expenses and help you plan ahead to avoid unpleasant surprises.

Creating a Realistic Holiday Budget

Many of us don't budget for holiday spending, often leading to post-holiday financial headaches. But a well-thought-out budget can save you from debt and regret. Creating a realistic holiday budget to balance your financial priorities with your holiday goals can be helpful. From assessing your financial situation to setting spending limits, you'll learn how to stay on track without sacrificing the season's joy.

Year-Round Shopping and Savings Strategies

Building on the idea of planning for the holidays in advance, we'll explore additional strategies to save money year-round. Tracking price drops, seasonal sales, and other strategies can help you stretch your dollar further - and maybe even reduce financial pressure around the holidays.

Managing Financial Stress During the Holidays

Even in a joyous season, financial pressure can become overwhelming for many. But there are ways to reduce holiday stress. So, we'll explore strategies like mindfulness that can help. In addition, we'll take a look at practical tips for discussing holiday spending with family and friends without causing tension.  

The Takeaway

Whether or not financial stress is part of your holiday season, join us to learn actionable steps for managing the financial challenges of the season. Whether you're looking to avoid holiday debt, find new ways to save, or feel more in control of your money, this week offers ideas you can put to work now.

Let's get started!

The holiday season is a time of celebration, joy, and connection. But it's also a time when many of us find ourselves overspending. Whether buying gifts, decorating the house, or preparing for festive gatherings, the pressure to spend can sometimes feel irresistible. What drives this behavior? It turns out that psychological factors deeply influence spending, and holidays are no exception.

Emotions and Spending

From joy and excitement to stress and loneliness, holidays can be an emotional season. These emotions can significantly influence how we spend money. When feeling joyful and connected, we may be more inclined to spend generously on gifts and experiences, seeking to share that happiness with others. On the other hand, shopping can become a way to cope when feeling lonely or stressed.

Known as emotional spending, this phenomenon is particularly prevalent during the holidays. Stress, in particular, can drive people to make impulse purchases as a form of self-soothing. For some, spending can momentarily alleviate stress or loneliness - but it may lead to regret later.

The holidays are also a social time, and these influences play a role in how we spend. Peer pressure can encourage us to spend more than we intended. When everyone around us is exchanging lavish gifts, it's easy to feel the pressure to do the same, even if it stretches our budget.

Holiday traditions and expectations can influence us as well. For many, cooking elaborate meals and perhaps traveling to visit family and friends are also part of the season (and that's in addition to purchasing gifts). These traditions can also create an unspoken pressure to spend, perhaps more than expected.

Insights From Behavioral Economics

Behavioral economics also offers insights into holiday spending. Concepts like the sunk cost fallacy and present bias explain why we sometimes make "irrational" financial decisions.

The Sunk Cost Fallacy

The sunk cost fallacy refers to the tendency to continue investing in something simply because we've already invested money or effort. During the holidays, this can manifest in situations like buying an additional gift because you've already spent a lot on other presents or adding more decorations because you've already spent money on a few.

The problem with this mindset is that it ignores the present value of money - and the pain of future debt. Just because you've already spent money doesn't mean you need to keep spending.

Present Bias

Present bias is the inclination to prioritize immediate gratification over long-term financial well-being. This natural tendency is particularly relevant during the holiday season. The holidays are, in fact, a deadline, so the temptation to buy now and deal with the consequences later can be powerful. Whether taking advantage of a holiday sale or splurging on a luxury gift, present bias leads us to make decisions that feel good in the moment but can cause financial strain down the road.

Being aware of present bias can help you pause before making impulsive purchases and consider the long-term impact of your spending decisions.

Recognizing and Avoiding Marketing Tactics

Retailers pay millions of dollars to consultants who are experts at using psychological triggers to encourage holiday spending. These tactics are often designed to create a sense of urgency - encouraging shoppers to act (and spend) quickly. Some common tactics include:

• Limited-time offers - These promotions make you feel like you're getting a great deal, but they also create pressure to buy immediately before the offer expires.

• Scarcity marketing - Messages like "Only 3 left in stock!" trigger a fear of missing out (FOMO) and prompt you to buy now, even if you don't really need the item.

• Emotional advertising - Many holiday ads tug at your heartstrings, associating products with love, joy, and togetherness. These emotional appeals can lead to impulse purchases based on feelings rather than needs.

While some holiday sales do offer genuine discounts, others can be potentially deceptive. To avoid falling into marketing traps, watch out for:

• Misleading promotions - Be cautious of ads that overstate savings or inflate original prices to make a discount seem more significant than it really is.

• Bundling tactics - Retailers often bundle items together to make you spend more than planned. If you only need one item, avoid buying the whole bundle.

• Purchase protection plans - These plans, originally used for large purchases like an expensive television, are increasingly being promoted for purchases as small as $20 or so. While "protection" sounds like a good idea, it's important to consider the terms and conditions of the offer.

Like having an awareness of the psychology behind spending, understanding these tactics can help you pause, reflect, and (ideally) make more deliberate spending decisions over the holidays.

Managing Spending Triggers

Now that we've explored the psychological and marketing triggers behind holiday spending, let's focus on practical strategies to manage holiday spending.

One effective way to control emotional spending is to consider a 24-hour rule. Here's how it works: when you feel the urge to make a purchase and you're not 100% sure about it, give yourself a day to think it over. The trigger that may have prompted the purchase may subside, and you may realize you don't actually need or want the item.

Setting personal spending limits can also help. By capping your holiday budget, you create a clear boundary that helps you resist overspending in emotionally charged moments. Of course, that's easier said than done.

On the other hand, mindfulness is also a tool that can be leveraged for managing spending. This approach involves staying present in the moment - and then making deliberate choices. During the holidays, mindfulness can help you separate your emotions from your spending decisions.

Here are a few mindfulness exercises to consider during the holiday season:

• Pause before purchasing - Take a deep breath and ask yourself if the purchase aligns with your financial goals.

• Gratitude practice - Focus on the things you already have, which can reduce the urge to buy more.

• Check-in with your emotions - Are you buying an item because you truly need it? Or could there be another reason related to stress or other emotions?

The Takeaway

Spending for loved ones is part of the fun of the holidays. And holiday spending is driven by a complex mix of emotions and even social pressures and marketing tactics. But understanding can help you take better control of your money - and avoid the pitfalls of emotional spending.

Even the most thorough holiday budgets can miss certain costs. These are the expenses we know about but don't fully account for - or those we simply don't see coming at all. While gift and travel costs might grab your attention when making a holiday budget, retailers often offer additional services that can add up in ways you may not expect.

Here's a familiar scenario: After shopping, you take gifts to the register and are asked, "Would you like to save X% by signing up for a store card today?" For those already stressed by holiday spending, saving 20% or 30% can be attractive, but is it really a good deal?

Let's take a look at some of the hidden costs that could impact your holiday budget.

Interest Charges

The holiday season often encourages increased spending on gifts, travel, entertainment, plus more. According to recent studies, the average household spends between $1,000 and $1,500 during the holiday season.

In reality, many of us don't have enough cash to cover everything we need for the holidays. The result? Credit card debt that can last well into the new year. And with credit card interest levels near all-time highs, this unplanned debt could mean that total holiday spending (including interest charges) may be considerably more than you originally paid.

Around 60% of consumers carry holiday-related credit card debt into the new year. So what's the impact? With rates hovering around 25%, the cost of carrying a balance can quickly add up. For instance, if you accumulate a $1,500 holiday charge and take six months to pay it off, you could end up paying an additional $375 in interest alone.

And this isn't just about the immediate cost. Extended repayment periods can result in a cycle of debt, making it increasingly difficult to achieve other financial goals. As we'll explore later in this week's theme, planning in advance is a great strategy for avoiding unplanned debt.

Point of Sale Add-Ons

Whether shopping in person or online, retailers increasingly offer additional options when checking out. Are they worth it?

Store Credit Cards

During the holiday rush, brick-and-mortar retailers often entice shoppers with immediate discounts or rewards for signing up for store-specific credit cards. These offers can seem like a great way to save money or earn perks, but they may come with a cost.

Store cards come with high interest rates, typically exceeding the rates of non-store cards. While an initial discount might be appealing (especially to those already stressed about holiday spending), if you carry a balance, the interest charges can quickly outweigh the savings. In addition, these cards often have limited rewards compared to general credit cards, making them less of a benefit in the long run. And with another bill to pay, there's also another chance to miss a payment - resulting in fees and even damage to your credit score.

Here's an example of store card potential cost versus benefit: A 20% discount on a $500 purchase might save you $100 upfront. However, if you finance the purchase over time with a high-interest store card, the interest accrued could negate your initial savings. For example, if you carry the debt for six months before paying it off, interest alone could be $70 or more. Sure, some of us may be able to pay off the debt right away and take full advantage of the discount, but that won't be the case for everyone.

Buy Now, Pay Later

Especially when buying online, offers to "buy now, pay later" often appear at checkout. These financing services offer to split payments into smaller, more manageable installments. Spreading out the cost of a purchase over several months without a credit card can be appealing, but there's often a catch.

Few of these offers are free, and the resulting fees and interest can significantly increase your total cost. Always understand the fine print and calculate the total cost before opting for such services. Comparing these options with traditional credit cards or personal loans can also help you make a more informed decision. And remember, like any credit, missing payments can result in additional penalties and damage your credit score.

Extended Warranties

Traditionally sold alongside electronics and appliances, extended warranty options are popping up on more and more items - sometimes on items costing $50 or less. While additional coverage beyond the manufacturer's warranty or to cover accidental damage might sound appealing, the cost can outweigh the benefits.

Extended warranties can cost anywhere from 10% to 20% of the item's purchase price. For lower-priced items, the warranty cost may exceed the potential repair expenses - not to mention the time and effort it takes to even claim the warranty coverage in the first place. Even for more expensive electronics, many repairs can be handled under the standard manufacturer's warranty or through the standard extended warranties offered by many credit cards (read your credit card's benefit policy for more information).

By carefully evaluating the cost-versus-value proposition of extended warranties, you'll make a more informed decision - potentially avoiding unnecessary holiday expenses.

The Takeaway

It's easy to underestimate how much you'll spend on gifts or hosting holiday celebrations. But as retailers and other companies move into services traditionally provided by banks, credit unions, and product manufacturers, there's the potential to simply say "OK" and purchase services that may or may not offer real value.

Of course, there's nothing inherently wrong with a store credit card or an extended warranty, but fully understand the pros and cons before making your decision.

The holiday season is often a time of joy, family gatherings, and celebrations - but it can also be a time of financial setbacks. Without a solid plan, it's easy to overspend, leaving you with a financial hangover that can last well into the new year. 

This is where a realistic holiday budget comes in. By taking a thoughtful, strategic approach to your holiday expenses, you can enjoy the season and minimize the stress of mounting bills.

Assessing Your Financial Situation

Before buying gifts or booking holiday travel, taking stock of your financial health is the first step. Understanding where you stand will help you set realistic expectations for your holiday spending.

Financial Health Check

A financial health check is the first step in creating a realistic holiday budget. This step involves evaluating your income, savings, and existing financial obligations to determine how much you can comfortably spend during the holiday season.

Start by asking yourself these questions:

• What's your monthly income?
• How much are you saving?
• What are your fixed expenses?
• What debt obligations do you have?

After taking stock of your finances, you'll have a clearer idea of how much you can allocate for holiday expenses without straining your budget or compromising long-term financial goals.

Understanding Your Financial Priorities

The holiday season often brings competing priorities: you want to celebrate, but minimizing debt is also important. Here are some key questions to ask yourself:

• What holiday traditions matter the most to you? Whether it's gift-giving, hosting a party, or traveling to see family, decide which aspects of the holiday season bring you the most joy and focus your budget on those areas.
• Where can you scale back? If there are holiday activities or purchases that aren't as meaningful to you, these are areas where you can reduce spending.

By aligning your holiday spending with your financial priorities, you can avoid low-priority expenses and focus on what matters the most.

Categorizing Expenses

Once you have a handle on your financial situation, the next step is categorizing your holiday expenses. This step helps you understand where your money goes and ensures every spending category is accounted for.

Holiday spending typically falls into several main categories:

• Gifts - List everyone you plan to buy gifts for, including friends, family, co-workers, and others. Include any charitable donations or "Secret Santa" gifts in this category.
• Travel - If you're traveling to see family or friends, remember to include the cost of transportation, lodging, and meals while on the road.
• Entertainment - Holiday movies, concerts, shows, and events can quickly add up.
• Decorations - Include costs for lights, wreaths, and any new seasonal decor you plan to buy.
• Hosting Events - If you're hosting a holiday gathering, include expenses like food, drinks, and decorations.

By categorizing your expenses, you'll gain a clearer picture of where your money will be spent and, ideally, avoid any last-minute surprises.

Small Expenses That Add Up

Some holiday costs aren't always obvious and can catch you off guard if you don't plan for them. Examples include:

• Increased utility bills - If you're hosting family or running holiday lights, your electricity and heating bills might spike.
• Extra groceries - Holiday baking, family dinners, and party snacks can increase your grocery bill, even if you're not hosting a big event.
• Travel incidentals - Whether it's gas, parking fees, or airport snacks, the seemingly negligible costs of holiday travel can add up.

By anticipating these hidden costs, you can adjust your budget to cover them, ensuring that your holiday spending doesn't derail your finances.

Setting Limits

Now that you've categorized your expenses, it's time to set spending limits for each category. This step gives you a roadmap for holiday spending and helps prevent financial stress in the new year from unplanned debt.

To allocate your funds, start by looking at your total available holiday budget - what you've determined you can spend based on your financial health check. Next, assign a spending limit to each expense category based on its priority. For example:

• If gift-giving is your top priority, you might allocate more of your budget to gifts and scale back on entertainment or travel.
• If you're hosting a party, ensure you've allocated enough for food, drinks, and decorations, while reducing spending in other areas.

Focus your budget on the essentials first, and avoid overspending on unnecessary items.

Finally, consider including a buffer in your budget to protect yourself from a financial setback - extra money for an emergency or unexpected expenses (like a last-minute gift, an unexpected travel expense, or something else you didn't expect).

A good rule of thumb is to allocate around 10% of your holiday budget as a buffer. This way, you'll have the flexibility to handle unforeseen costs without blowing your entire budget.

The Takeaway

Creating a realistic holiday budget is the key to enjoying the season without financial regret. By assessing your financial situation, categorizing your expenses, setting clear budget limits, and holding yourself accountable, you can ensure that your holiday spending aligns with your long-term financial goals.

A traditional spreadsheet, notebook, or the Notes app on your phone – when it comes to making a holiday spending worksheet, the format doesn't matter. What counts is easy access and the ability to update as you spend. This way, you create a realistic budget that covers all your expected expenses and track it as you go.

Creating a Holiday Spending Worksheet

First things first: Where will your money go? Your spending worksheet should reflect your unique situation - family size, lifestyle, and commitments. Categories to consider include:

• Gifts for family, friends, and coworkers.
• Gift wrap, packaging supplies, and shipping.
• Holiday meal and entertaining expenses.
• Holiday cards and postage.
• Travel costs.
• Other events related to the season such as potluck dinners, restaurant meals, movies, and concerts.

Your budget will be unique, but setting a figure you can afford helps you allocate funds appropriately. For example, imagine you have a family of four. Start by listing everyone you need to buy gifts for. Based on your total budget, assign a spending limit per person. If your budget is $500 and you have ten people to buy for, that's $50 each. Adjust as needed if some gifts require more or less.

Allocate a Budget for Each Category

Gifts often top the list. So you can start by making a recipient list (and checking it twice). If you have gift ideas, note them down with their expected costs. If not, decide on a spending limit per person. Move to other categories and determine if each is a must-have this year.

Maybe you can cover everything, or perhaps you'll need to trim some areas. It's okay to prioritize. Focus on what matters most and adjust accordingly.

If you're unsure about your budget, use last year's spending as a reference point. Download your debit and credit card statements from last year and add up the holiday spending you can identify. If you spent around $1,000 in total last year, ask yourself if it was affordable. If not, adjust this year's budget to an amount you can afford without overspending.

Track Your Spending in Real Time

Once you've set your budget, monitor your spending by updating your worksheet as you spend. Knowing where your money goes helps you stay on track, so update it whenever you make a purchase. If one category starts to run high, see if you can cut back elsewhere.

For example, if you notice you've spent $550 on gifts when your limit was $500, it's time to consider tightening the reins elsewhere. Perhaps skip a few extra decorations or reduce the budget for holiday meals.

Flexibility is key. One approach is also to set aside a small buffer in your budget for unforeseen costs.

Planning for Next Year

After the holidays, save your worksheet and review it in January. Note which categories were over or under budget. For example, maybe you spent more on travel but less on gifts. Use these insights to tweak your budget for next year.

Action Item: Create a savings plan based on your holiday budget. Allocate a small amount each month leading to the holidays to avoid a financial crunch.

Communicating with Family and Friends

Money talks can be tricky, especially during the holidays. But having open and honest conversations about your budget can make the season smoother for everyone. Acknowledge that everyone's financial situation is different and that the goal is to enjoy the holidays without added stress.

Here's how to navigate these conversations with grace and maybe even a laugh or two.

Breaking the Ice

Starting the conversation may be a challenge, but approaching it with empathy and understanding can make a big difference.

It's also helpful to avoid waiting until the last minute to bring up your budget. Mention it early in your holiday planning to set the tone. For example, consider saying something like, "I'd like to keep this holiday season budget-friendly when discussing gift exchanges or gatherings. Let's find ways to celebrate without breaking the bank."

Or you could start the conversation with a joke like, "Let's make sure our wallets don't need a holiday after the holidays!"

Be Honest

If you're not in a position to spend much, it's okay to say so. True friends and family will understand and appreciate your transparency. You could even use a lighthearted approach to ease the conversation. For example, "This year, my wallet is on a diet, so my gift will be all about quality time instead of quantity of presents!"

Addressing Gift Expectations

Sometimes, the pressure comes from unspoken gift expectations. Address this by having a candid conversation about what everyone expects. It can help realign everyone's expectations and reduce unnecessary stress.

For example, during a family meeting, bring up the topic: "Let's talk about our gift expectations this year. I want to make sure we all feel good about what we give and receive without feeling pressured."

The Group Gift Option

Group gifts can be a great way to give something special without burdening each person. Coordinate with others to pool resources and buy a bigger gift together.

For example, if your brother loves tech gadgets, gather contributions from the family to buy him the latest headphones or a smartwatch. This approach spreads the cost and ensures he gets something he wants.

On the other hand, for families with large numbers of adult brothers and sisters, another option is to create a system where each person buys one gift for another sibling. You can make it more fun by doing a random drawing before the holidays so each person could get a different sibling each year. Further, siblings could pool resources to buy one special gift for your mother or father instead of a gift from each person.

The Takeaway

A holiday spending worksheet can transform your season from stressful to smooth. By planning ahead, setting clear budgets, and tracking your expenses, you can take control of your money and enjoy the season without a financial hangover.

Shopping smart doesn't mean waiting for the holiday season to kick into gear. One key to staying financially fit around the holidays is using savvy shopping techniques throughout the year. By spreading out your purchases and being mindful of deals, you can reduce holiday spending without sacrificing what you need.

Many of us fall into the trap of shopping when we need something immediately, especially for holiday gifts. But shopping reactively can also mean paying more than necessary. Spreading out holiday purchases over time helps you incorporate that spending into your monthly budget (thus reducing the chances of holiday debt), take advantage of seasonal sales, and it gives you more time to make thoughtful, well-researched purchases.

Holiday Savings: A Strategic Approach

Here are some strategies for making the most of your holiday budget.

Timing Spending with Seasonal Sales

Almost every product category has a seasonal sales cycle. As you probably know, the best time to buy gift wrap is after the holidays. But it works the same way for many products: retailers clear out seasonal clothes as the seasons change, so you can often get great deals on summer clothes at the end of summer or winter clothes at the end of winter. The same goes for electronics (early in the year before the new models arrive) and outdoor gear (at the end of the summer). By planning ahead and timing your purchases to these cycles, you can pick up gifts and related items at their lowest prices and avoid paying more when demand is high.

Building a Savings-First Mindset

One of the best ways to be ready for year-round shopping is to cultivate a savings-first mindset. So rather than waiting for a sale to appear and scrambling to find the funds, focus on consistently saving so you're prepared whenever a deal comes along.

Setting up an automated savings plan is one of the easiest ways to ensure you're putting money aside regularly. By automatically transferring a small amount of money from your checking account into a savings account every pay period, you'll build up funds for future purchases without even thinking about it. So whether you're saving for a big purchase, a vacation, or just building a buffer for the unexpected with an emergency fund, automated savings helps you stay prepared.

Using Technology to Your Advantage

With a bit of planning, it's never been easier to find deals, compare prices, and save money. By using a combination of apps, websites, and other tools, you can optimize your shopping strategy and pay the lowest possible price.

Explore price comparison websites to compare current and historical prices. Tools like Google Shopping and CamelCamelCamel automatically search for better prices across the web or alert you when a product you're interested in drops in price. Similar tools are also built into browser extensions but remember that there's a trade-off - the extension provider then learns everything about your interests and shopping habits. So if online privacy is important to you, price-tracking websites may be a better option.

Stockpiling for Future Savings

We've already mentioned that prices for gift wrap are the lowest after the holidays. That's an example of stockpiling, and it also works for other items. Entertaining supplies, canned food, plus more can be purchased well in advance when the price is low. Buying in bulk can lead to even more savings - assuming you have the storage. This approach is also helpful for non-holiday spending. If you spot a good deal on something you know you'll eventually need, consider buying enough to last for several months (think toiletries, paper towels, etc.).

Pro Tip: Avoiding Impulse Buys

One of the biggest challenges with year-round shopping is avoiding unplanned spending. After all, if you're looking for a sale, it can be hard to take advantage when you find a deal. But the key to long-term savings is sticking to your plan and resisting the temptation to buy something just because it's discounted. That's why "saving with a sale" isn't always savings - if you wouldn't have bought something otherwise, what does it matter if it's 50% off?

Whenever you're considering an unplanned purchase, try using the 24-hour rule. This step means waiting a full day before buying to give yourself time to think it over. Often, the excitement of the moment fades, and you may realize you'd rather do something else with your money.

The Takeaway

The average family spends over $1,000 during the holidays, often resulting in credit card debt that's paid off over time - meaning the actual cost, including interest, could be even more.

Incorporating year-round shopping and savings strategies into your financial routine is a smart way to reduce stress, maximize deals, and minimize the chances of unplanned debt. By taking advantage of seasonal sales, using technology to find the best prices, automating your savings, and managing impulse buys, you can save without sacrificing the things that matter most to you.