Five ways to stay on budget this holiday season

The holidays can be expensive, and not sticking to a budget can lead to out of control spending and debt that lingers long after the holidays have ended. To avoid that, here are five ways to keep spending on track this holiday season.

Reuters/Mark Makela/File
Shoppers browse at Neiman Marcus at The Plaza, King of Prussia Mall, United State's largest retail shopping space, Pennsylvania. Tracking your spending is vital for the holiday season.

Make no mistake about it: The holidays can be expensive, with each American expected to spend more than $800 during the 2014 holiday season, according to the National Retail Federation.

It’s perfectly fine to be in a giving mood. But failing to create and stick to a budget can lead to out-of-control spending and a debt hangover that lingers long after the holidays have ended.

Here are five ways to stay on track this holiday season.

1. Decide how much you can afford to spend

How much you feel comfortable spending this holiday season ultimately depends on how much discretionary income you have each month. This is money that is left over after paying for necessities like food, shelter and clothing. But it does not include emergency savings, investment accounts or retirement savings you’ve already set aside, as this money should be left untouched.

As a general rule of thumb, 30% of your after-tax income can be budgeted for discretionary income, 50% covers necessary living expenses and 20% goes to savings. So if you take home $3,000 a month, $900 can go to discretionary expenses, while $1,500 covers living expenses and $600 goes toward savings.

To get started, look at credit card or bank statements from last year’s holiday season for an idea of how much you spent then. If you conclude the figure was a reasonable amount, then it could be a good number to start with for this year.

2. Craft your budget

Next, create your budget and set a spending limit for each category, including presents, holiday dinners and parties, and decorations.

Make a list of all the people you want to buy presents for this year and estimate how much you think you can afford to spend for each person. The total figure should be a reasonable amount that leaves you with enough money for other holiday expenses like decorations and traveling. You can then write these figures down in a notebook or in a budgeting spreadsheet for when you hit the stores.

It’s a smart idea to research the cost of each gift beforehand, says Andy Tilp, a financial advisor with Trillium Valley Financial Planning.

“That way, you can get the big picture of all the expenses before you start to buy,” Tilp says. “If it’s too much, then you can pare down and not be surprised and stressed at the end when the budget has run dry and there are still items to get.”

When it comes to teachers, co-workers or other acquaintances, ask yourself whether an expensive gift is even necessary. After all, a holiday card or a more personalized gift is thoughtful and less damaging to your wallet.

3. Track spending

Of course, you’ll need to track everything you spend. Record the details of every purchase on a spreadsheet or in a notebook. Or, you can use a mobile app like or You Need a Budget, where you can track spending and view all of your transactions.

“If you find yourself having trouble staying within the limits you set, then you can do things like the envelope system, where each recipient of a gift has an envelope and you can only spend what’s inside of it,” says Brian Frederick, a certified financial planner with Stillwater Financial Partners. 

4. Consider using credit cards

Using credit cards over cash can provide numerous benefits, like rewards for your spending and protection from unauthorized and fraudulent charges.

For example, if you plan on spending $800 in cash on gifts but use a rewards card that pays a flat 2% rewards rate, you’ll earn $16 on your spending. Plus, you won’t have to worry about thieves picking that cash from your pockets.

Some cards might even offer price protection, where the credit card company will give you a refund if an item you bought declines in price during a certain timeframe; purchase protection on products that break or are stolen; and extended product warranties.

“I much prefer folks to use a credit card,” Frederick says. “Not only can you get cash back, but a lot of the time you have things such as price protection and extended warranties included at no charge.”

5. Avoid debt and plan for next year

Keep in mind that if you carry a balance on your credit card, the interest you’ll pay will likely cancel out any rewards. And if your credit card balance climbs high enough, it could negatively affect your credit score.

In this case, sticking to a cash budget is probably the better way to go, as it will help you stay out of debt and avoid running up a high credit card balance. But if you can pay off the balance in full each month, credit cards are likely the better option.

Finally, it’s never too soon to start thinking about next year, so why not begin saving now? Try to set aside at least $50 a month for next year’s holiday shopping so by the time next December rolls around, you’ll have more than $600 saved. This balance will grow if you stash the money away in an interest-earning savings account or a certificate of deposit.

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