How to Budget Backwards to Keep Holiday Spending in Check

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It’s a simple fact that the holidays come around every year. So why is it that we’re oftentimes financially unprepared? According to a holiday spending survey by Experian, 56 percent of people said they spend too much during the holiday season. That’s worrisome.

In 2016, 38 percent of American households carried an average credit card debt of $16,061, and holiday debt adds, on average, about $1,000 to that debt load.

If you’ve racked up debt from holiday spending in years’ past, you can prevent that from happening this time around. I can tell you how.

I watch my spending throughout the year and always pay my credit card balances in full. I make no exception during the holidays. I participate in the holidays as fully as anyone else. So how have I managed not to overspend and accrue debt as a result? I budget backwards.

1. Make a List and Check it Twice

First, make a list that includes every predictable holiday expense. Yes, everything, from the ingredients for your Thanksgiving dinner to every single person on your holiday gift list. Estimate how much you will spend on food, and roughly how much you’ll spend on presents for the people on your gift list. Because I feel extra generous at the end of each year, I know I’ll want to make donations to some charities so I am sure to include that in my budget.

If you’re feeling really organized, include Halloween spending along with Thanksgiving and Christmas. Budget your costume, admission to haunted houses, and candy for those neighborhood ghouls and goblins.

I live near my family and work from home, so I don’t have work-related or travel-related holiday expenses. Of course, your needs may be different. Think about any holiday parties or social gatherings you’ll attend, gifts for co-workers, and travel.

It may seem like a pain to create such a list, but it helps big-time. Plus, your wallet will thank you for taking the time now to make a plan if it helps you avoid debt in the New Year.

2. Calculate Your Total – and Then Some

Once you create a list and an estimate for the cost of each item you can add it all up to arrive at a ballpark total sum that you’ll need to save up. This is your budget starting point. Then you can work backward.

3. Pad the Fund

Aim high. According to the Experian holiday survey, 31% of the people surveyed went into debt from unexpected holiday expenses. Perhaps your plane tickets cost more than anticipated, or you have a few more people to buy gifts for — it’s easy for this to happen. For safe measure, add a bit of padding to your holiday spending budget. For me, adding a buffer of a few hundred dollars usually does the trick.

Remember, many people overspend, so come up with a number that will comfortably cover everything on the list. If your total is unrealistic, you’ll know well ahead of time that you need to cut some items or lower the allotment (think per-person gift budget).

4. Come Up with Your Plan B

If you have to let go of some items on your list or cut back on how much you can spend on each person, just set a lower goal. Don’t stop saving.

Revisit that gift list. Can you stick to family only? Kids only? Give homemade or baked goods? As a rule, I don’t generally buy Christmas presents for my friends. I will treat them for their birthdays, but not during the holidays. I have a huge extended family. We’ve agreed to do Secret Santa for the adults, and buy individual gifts only for the kids. You can also negotiate travel plans, too. For instance, maybe you can travel to see your family for Christmas, but not Thanksgiving.

In the worst-case scenario, make a pact with yourself to limit your credit card debt this year. While it’s not ideal, facing $400 in credit card debt in January is far better than $1,000.

5. Commit to Regular Savings

Now that you have your starting point, you know how much you need to set aside from each paycheck between now and the holidays. For instance, if you estimate a total $1,200 and you start half way through October, you’ve got about 10 weeks to save. That’s $120 per week, or $240 from each two-week paycheck.

Set your savings goal earlier in the year and it gets easier. If you start saving for the holidays on Labor Day, you’d only have to squirrel away $70 each week. If you create a holiday fund and contribute all year ‘round, that’s only $23 a week.

Make a commitment and back it up. Set up an automatic transfer to a designated holiday spending fund.

Remember, the more you can set aside small amounts ahead of time, the less pinch you’ll feel when it comes time to shop.

6. Find Extra Cash

Pour money from side hustles and bits of savings into your holiday fund. I pet-sit for a friend and put the money earned into my holiday spending budget. Check out out-there side hustles, and weird things to sell online.

7. Use Rewards Points, Spare Change and Gift Cards

This is the perfect time of year to cash in your credit card reward points. I usually redeem my rewards points for gift cards to use for gifts and dining out with friends. I also keep change in a jar and cash it out for an Amazon card every winter, netting anywhere from $100 to $200. Take inventory of all your unused gift cards and use them to buy presents.

8. Don’t Change Your Credit Card Spending

The holidays aren’t an excuse to go hog wild, splurge on Black Friday, or buy lavish presents for your loved ones that you can’t afford. Keep – or establish – the habit of paying in full each month. Treat credit card purchases as a way to rack up points and build credit, nothing more.

I do usually put holiday-related purchases on my credit card, but then use money from my gift fund to pay off my balance in January. I use a single card. This helps me maximize rewards on that card and keep track of my spending.

If you’re thinking applying the backward-budget approach, it’s not too late. In fact, you can start now. It could help you avoid overspending this holiday season, and head off feelings of financial stress and the pressure to spend more than you can afford. And that’s probably the best gift you can give yourself.

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