Wednesday, November 15, 2017

How Much Of Your Paycheck Should You Spend On The Holidays?

The Holidays are right around the corner.  We got Thanksgiving in less than two weeks, and Christmas in less than two months.  It has never been a better time to be a Jehovah Witness.  They don't celebrate crap!  And in the process they save a ton of money all year long.  It's also great if you're Jewish because Hanukkah apparently really isn't the most important holiday of the year for my Jewish peeps, and there's no need to go Christmas shopping of course.  So the rest of us (and I apologize if I left out your religion) are stuck once again figuring out just how much we should be spending, outside our normal monthly budget, on these traditional times.

Image result for Thanksgiving and Christmas

The holidays are perhaps when staying disciplined financially is the hardest.  The "holiday spirit" sets in and people start to feel warm and wonderful all over.  So it's a super emotional (not logical) time of the year.  Shopping, also an incredibly emotional experience, is like the match that lights the gasoline.  We allow ourselves to get carried away online or at the mall because our brains are chock-full of endorphins, our bodies are on never ending sugar highs (think Pumpkin Spice Lattes, Hot Chocolate, Pies, Ice Cream, etc.), and our soul is full of love.  Essentially "giving," which usually isn't free, trumps "saving."

How bad does saving get neglected during the holidays?  Would you believe the majority of Americans will spend at least one paycheck on Thanksgiving and Christmas?  GoBankingRates survey of 2000 adults (cited in the linked article) across the U.S. is eye opening.  More than half of respondents, some 57% said they will shell out at least one entire paycheck on the combined expenses for turkey day and Xmas.  The average pay for Americans who get paid every two weeks is $1,908 by the way.  Folks that's a lot of money for just two fancy meals and presents for the kids.  If that's not the straw that broke the camel's back then the next finding is.  The remaining survey respondents, nearly 44%, said they plan on spending more than one paycheck for these two days of the year!

How Much of Your Paycheck Should You Spend on the Holidays?

I did a Google search and scoured the first page for some answers and this is what I found:

1) No more than 1.5% of the annual family gross income on Xmas presents, decorations, trees, etc. (Source, should be spent.  If the total gross income between you and your partner is $100K, then 1.5% would be about $1,500.  However they point to a 2011 Deloitte Development survey that many people spend less than 1.5%.  For the couple earning $100K, the average on Xmas was $800.  For households making less than $100K, the average on Xmas was $300.  With inflation, we're talking easily over $900 and $400, respectively, for the two groups noted.

2) An even simpler formula is shared at The Clear Point Blog.  They recommend you spend 1.5% of your net income on the holidays.  Currently, the average household income in the U.S. is a little over $59K.  So, 1.5% of this amount would represent a holiday expense budget of $885.  We're back at $1,500 for those households making $100K.

Spending 1.5% of your annual income on the holidays is a good rule of thumb.  So if we go back to the top where one paycheck represents on average $1,908 (or $49,630 in annual wages), and do some easy math, $1,908/$49,630 is 3.84%.  Clearly the average American is overspending on the holidays no matter how you slice it.  Is going over this 1.5% recommendation okay?  It depends.

I'd say if your debt to income ratio is low, meaning you have little debt, high income, or both, go ahead and spend that entire 2-week paycheck on the holidays.  In case you didn't know, to calculate your debt to income ratio, divide all of your current monthly debt payments (mortgage, auto and student loans, etc.) by your monthly income.  If your debt to income ratio is high, don't you dare spend an entire paycheck on the holidays!  You can't afford it, plain and simple.

Still confused how to figure out how much you should spend? has an excellent "Holiday Budget Planner" that factors in your personal income to determine an appropriate budget.  When using $100K as a household's gross annual income, the HBP breaks down the budget as,

Gifts, $450, 30%
Parties, $150, 10%
Travel, $600, 40%
Food, $225, 15%
Donations, $75, 5%

How to Stay on Budget?

To stick to your budget you're going to have to be very self-disciplined, self-controlled, and creative.  Since gift giving and travel are the two likeliest categories where you'll overspend, I suggest you review your past practices and brainstorm new ones.  For example, do you have to travel somewhere this year?  Can loved ones come to your place for Thanksgiving?  If not, can you drive instead of fly your whole family to your destination?

When it comes to gift giving, go back and see how much you spent on people last year.  Try the following:

1) Trim your gift giving list.  Just tell your cousins and close friends you have to cutback this year because funds are tight.  They'll understand.

2)  Do a Secret Santa gift exchange with extended family.  Pick names and shop just for one person.  I do this with my siblings.

3)  Make gifts yourself.  If you knit, or are a great artist, photographer, etc., consider making meaningful gifts for others.

4) Give a certificate of a professional service you perform.  For example, if you're a massage therapist, give a loved one a free massage at your place of work.

5)  Consider re-gifting.  I get Starbucks cards at work almost every year.  I give those away as gifts to other people, and save myself both time and money.

Be smart about the holidays this year.  I can assure you that you will feel just as good about yourself if you truly focus on maximizing the experience of being with family during the holidays, and not worry so much about how much you spent on other people, food, and parties.  Thanks for reading!

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