Hard Times Warrant a Second Look At Holiday Budget

For most gift givers, holiday shopping is a lot more meaningful than just a trip to the mall. It's part of a tradition that sets the tone for the entire season—showing friends and family that they care, finding joy in the happiness of others.

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With the economy in a tailspin and unemployment on the rise, however, many families this year are putting a limit on how much of their hard-earned money they are willing to drop on iPods and designer jeans.

Should you spend a percentage of your income? Buy for children based on their age? What do you do if your friend gives you box seat tickets to the orchestra?

Indeed, holiday spending can get out of hand in a hurry, forcing many families to start the New Year mired in credit card debt.

“I think because we are such a consumer-oriented society that if we don’t spend a certain amount there’s a lot of guilt attached with that,” says Kristine McKinley, a certified financial planner with Beacon Financial Advisors in Lee’s Summit, Mo. “But if you haven’t maxed out your 401(k) retirement plan or saved for an emergency fund, you shouldn’t be spending $1,000 on gifts for your kids.”

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How do you stack up?

For a little perspective, it may help to determine where you rank as a holiday shopper relative to your peers.

The National Retail Federation’s 2008 Holiday Consumer Spending Survey found the average consumer this year will spend $832.36 on holiday-related purchases—an increase of less than 2 percent from last year.

As usual, gift giving will be the biggest component of shoppers’ budgets, with the average person expected to drop $466 on gifts for family, $95 on friends, $27 on co-workers, and $44 on gifts for those who fall in the “other” category. Those are just averages, of course.

Many consumers spend far less—or far more—during Christmas, Hanukkah and Kwanzaa, which doesn’t mean they’re wrong, says McKinley.

“It’s based on your own unique situation,” she says. “If you’ve got your [financial house in order] I don’t see why you should place a limit to how much you spend.”

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Don't Go Into Debt

That said, there are some financial guidelines that can help keep your spending in check,

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regardless of your income.

“In years past we told people not to spend more for the holidays than they could pay off within 90 days, but times are harder this year so I’d recommend spending no more than you can pay off in 30 days,” says Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego. “If you’ve lost your regular income, keep it on a cash basis.”

That’s good advice says Cary Carbonaro, a certified financial planner with Family Financial Research in Clermont, Fla.

“Don’t go into debt,” she says.

Those with job stability and disposable income to spare might also consider opening a holiday savings account, into which they can contribute a fixed percentage of their monthly income.

“If your financial situation is stable you might consider contributing 1.5 percent of your gross income into that holiday account,” says Nancy Porter, a professor and family resource management specialist for Clemson University.

In other words, if your income were $80,000 last year, you would have accumulated $1,200 for your total holiday budget.

• Holiday Spending Work Sheet

Write It Down

The most effective trick to keeping your spending in check is to decide—before you hit the mall—is make a budget.

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First, determine how much of your disposable income is available. (There’s no law that says you have to spend it all!)

Next, write down the name of every person on your shopping list, and parcel out your available dollars among them.

“Write down a list of everyone you need to buy for and how much you can spend on each of them—and stick to it,” says Carbonaro, noting consumers should avoid the temptation to overspend just because they stumble upon a pricey gift that their loved one would enjoy. “If you have a budget ahead of time you‘re less likely to go crazy.”

Don’t forget to include in your holiday budget money for travel to visit family, holiday cards and postage, food, and any decorations you plan to buy.

“Include everything, not just the gifts,” says McKinley. “Food can get really expensive if you’re hosting a holiday event.”

Indeed. The National Retail Federation reports the average consumer will spend $95 on candy and food—as well as $51 on decorations, $32 on greeting cards and postage, and $23 on flowers this season.

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Kids Stuff

Children are often a gift giver’s undoing.

After all, it’s fun to buy toys. And we all strive to deliver that one special present that fills the heart with joy.

Before you let your credit card get the better of you, though, keep in mind that kids enjoy the element of surprise—the unwrapping of each unexpected treat—as much as the gift itself.

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“Use common sense with your kids,” says Richard. “If your children are used to big Christmases [and you’re on a tighter budget] give lots of smaller inexpensive gifts which are just as much fun to open.”

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Porter adds you don’t necessarily need to spend the same amount on every child—as long as they’ve got an equal number of packages. (It’s only natural that older children graduate into more expensive gifts.)

Finally, she says, resist the urge to keep up with the Joneses.

If your child’s best friend gets an iPod and an American Girl doll it may be time to explain that some families have more money than others—paving the way for a healthy conversation about the non-monetary things that make the season special.

Family And Friends

When it comes to buying for the adults in your life, either friends, family or business associates, it’s entirely your call.

Porter says you should allocate your expenditures based on the size of your immediate family and circle of friends.

If money is tight, it’s entirely appropriate to celebrate the season with a pay-your-own-way dinner out with your closest friends.

You can also draw names so each person gives and receives a single gift or skip the exchange altogether this year if one or more of your friends is struggling financially.

“It works best if the person with the most resources makes that suggestion,” says Porter. “It’s really hard for the person struggling to have that conversation and as a result they usually go further into debt to keep up the status quo.”

Here again, McKinley says you should avoid the high stakes game of one-upsmanship.

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Just because your neighbor gave you a $100 bottle of wine doesn’t mean you should blow your budget to reciprocate.

Stick with your plan and give the gift you can afford.

“If someone wants to be incredibly generous that doesn’t mean they expect to get that kind of gift back,” says Carbonaro.

There’s no magic number that will tell you how much to spend on holiday gifts this year.

It all depends on your income, job security and the number of people on your shopping list.

In today’s uncertain economy, however, keep in mind that gifts from the heart (a framed photo for Grandma, homemade cookies for your friends) can be far more meaningful and budget-friendly.

“No one wants a gift that someone else had to go into debt to get,” says Richard.

© 2008 CNBC.com