“What’s Christmas Time to you but a time for paying bills without money…?”
— Ebenezer Scrooge
It’s not all about the overeating. It’s the holidays and the heat is on — to overspend.
“There is certainly a lot of pressure to overextend your budget this time of year,” said Alicia Clavell, a writer and business communications instructor. “In fact, just before I checked your email, I checked my checking account. I’m trying to figure out how to balance my budget so that I can pull off a holiday party this Friday and still finish holiday shopping.
“I know I certainly feel financially overextended this month, and I, along with others, certainly feel pressured to do so at this time of year. ”
All that love for the family, all that anticipation, all that competition to give the best gifts, all that appealing advertising — it can take its toll on the unwary. The credit education website myFICO.com put it this way: “The holiday season can bring more surprises than a pair of argyle socks or a knitted sweater embroidered with your name – it can also cause the post-holiday blues when you get your credit card statements after the last of the eggnog is gone! Retailers bombard you with special promotions like 10 percent off of your total purchase by opening a department store credit card with them. These offers are hard to resist when you want to get your family and friends the perfect gifts, so I understand the temptation to charge, charge, charge.”
Andreas Rauterkus, an associate professor of finance at the University of Alabama at Birmingham, teaches, among other things, personal finance. Dealing with the pressure to spend when you don’t have the money to buy is an all-too-common problem in his line of work. And that’s especially so this time of year.
“It’s the holidays and everybody wants to buy gifts for their loved ones and their friends. And the problem is that a lot of us might have a budget for the holidays and how much we spend is easily, easily overspent in the holidays,” Rauterkus said.
“Credit card use tends to spike in those holiday months of November and December. As soon as the first credit card bill comes home and you see your balance then you realize, ‘OK, I obviously overspent, because every time I spent off the credit card. That means I’m spending more than I should have and I’m not spending out of savings, but I’m spending out of credit.”
It’s a mental thing
Ultimately what it takes to avoid overspending during the holidays is the same thing it takes to avoid overspending at any time: developing good habits, including learning to budget.
Rauterkus teaches his students that “You should have a budget for everything. And the hardest part of this is to stick to the budget, but if you can’t afford it, you shouldn’t buy it, no matter if it is for yourself or somebody else. It’s very basic. I know it’s very difficult to follow, but it’s really a very basic concept that if you do plan purchases that you can generally not afford, you’re going to have to save up for that.
“So you would have to have a budget item in your budget that says, ‘OK, I’m saving x amount of money every month to put aside for Christmas presents.’ The best way is to say, ‘Okay, I have a budget, I’m going to put aside this much for Christmas. Over the course of the year, I can put that money aside so I can have it available when it comes time to buy those gifts.’”
Of course, everybody talks about the budget, he said.
“What I find is that you talk to people about budgeting and they all nod and say a budget is a great thing. And it’s an easy thing to do. A lot of people don’t bother to do it. A lot of people don’t do it right . And then the hardest part of it is to stick to it.
“It’s easy to make a budget. Now, it’s the easiest thing in the world. All you’ve got to do is put some numbers to a sheet of paper. But actually sticking to the budget is a completely different matter altogether.”
So if it’s so easy to create a budget, why is it so hard to keep one? The problem is in the heart and mind of the individual consumer, Rauterkus said. “It is the needs versus the wants. That’s always what derails people that you know that see something, that want something. It is always insinuated to them if you go to stores that, you can buy this, you can finance this. It’s the same as cash for the next 18 months or 12 months. And all of those kinds of things. Because it’s there, it’s easy to get those, to make those purchases.”
According to Rauterkus, the ease of financially kicking the can down the road is deceptive. “I don’t have to wait, I can finance it and I don’t think about the budget consequences. It’s just thinking, ‘Oh, I can afford that. I can afford an extra $10 a month in payments that I have to make,’ when I might not be able to afford it, or these kinds of things add up.”
Also, for many people, the budgets they create are very often incomplete, he said. “Daily spending habits are a lot of times not reflected in the budget. Like people going to Starbucks every day, let’s say, to buy a coffee. It might not show up in the budget, but if you do that every day over a whole year, you’re talking about $1,500 to $2,000 just spent on coffee.”
While fixed costs, like rent, mortgages, car notes, some utilities and bill payments can be easy to slot into a budget, it’s the daily purchases that may be overlooked. “How much do I spend on food? How much do I spend on clothes? … These much more soft accounts, that’s where it’s very difficult for people to stick to a budget.”
Impulse buying, a part of the problem for many, is not easy to control, but it must be controlled, Rauterkus said. “I just tell them again to think about needs versus wants. If I want something, I need to make sure I have the money for it. So I have to have short-term financial goals. If I want to buy this, this certain item, I need to have enough self-control to save for it. Again, this is all much easier said than done.”
Few people are surprised to learn that the way stores are arranged — even grocery stores — is designed to play on impulse buying habits. That common marketing ploy can be managed by planning ahead, Rauterkus said.
“If you go to a store you have a list. The biggest problem that a lot of people have is that they go to a grocery store to buy groceries and they don’t have a list. If they go to the store without a list, they tend to buy a lot more than they ever need. I need to know exactly what I need and I need to make sure that that’s the only thing that I actually end up buying.” Having a plan and sticking to the plan in the form of the list “is the biggest way to save money,” Rauterkus said.
Old habits start early
How people spend money, whether wisely or not, often develops in their youth. Those habits can be hard to break as years pass, and the financial consequences can be serious.
“That’s why we always try to get to kids as early as possible in order to try to teach personal finance habits as early as early as high school, at least the moment they get into college,” Rauterkus said. “You might be running up debt at a very early age that you’re then going to need years to actually pay off. Budgeting — and saving, for that matter — is a habit. And the very first thing that I always tell everybody is that your savings have to be part of your budget. Savings is not a left-over item. In other words, I’ll save what I have left over at the end of the month. If I do that, I’ll never save a dime.
“At Junior Achievement I teach personal finance at high schools. I tell them, you take 10 percent of your paycheck every month, and put it aside. You make that a habit and you’ll do it your whole life, because you won’t know any different and it will never even cross your mind. It’s just like your taxes. It’s just to to take it out before you even touch the money. Take out 10 percent off the top. That will be a lifelong habit, and it’s going to be so much easier for you to save money.”
Rauterkus is one of several finance experts who teach these life skills through Junior Achievement, but he said he only reaches 60-70 students in a year. But he also teaches the same financial wisdom for a wider audience through the “Dollars and Sense” program at the Jefferson County Public Libraries. “Across all the Jefferson County libraries we have programs. We have workshops we put on about budgeting, and investing and savings. … There is much talking about college and saving for that.”
The program at the libraries is organized under the title, “Making Cents: Resources to Help Your Money Grow,” produced by Smart investing@your library, a partnership between the American Library Association and the FINRA Investor Education Foundation. For more information about the free resources, visit making-cents.org or click the link on the JCLC homepage.
Beat the rush
Even for people who have had a longstanding problem with outspending their budget — whether at Christmas or any other time of the year — the solution remains planning, Rauterkus said. “Since I know I have this problem, I need to have a budget. That’s the number one.
“Second, I don’t necessarily have to buy all my Christmas gifts in December. In other words, if I know I want to give gifts to this person, that person and that person, if there comes an opportunity along during the year where what I know I might want to give that person is coming up on a sale, or something like that, it might be a good idea that I buy somebody’s Christmas present already in July if I can get a great deal. Nobody says they have to be bought in November and December. They can be bought all year long.
“It’s not just a matter of buying early to beat the rush,” Rauterkus said. “But in the long-term process, if I plan all these things, I’m much less likely to overspend. When it comes to finances, a good financial plan makes all the difference.”