The American Research Group predicts that the average person they surveyed will spend $929 on gifts this season. Among parents, the numbers can go higher. Newly released T. Rowe Price data indicate that on average, parents expect to pay some $422 per child. And 34 percent say they will spend $500 or more.
How do they manage the beyond-budget spending? About 25 percent take drastic measures, withdrawing money from 401(k)s or their emergency savings. Or they take out payday loans to finance their holiday spending. Even among families who start the year with good intentions, 58 percent fail to stick with the holiday budget they have set.
A large number will whip out the credit cards to finance gift-buying, with the inevitable result of laying on credit interest. For instance, using the $929 average figure as a base, if your credit card charges 18 percent interest, you’ll spend $1,022, and each month it takes you to pay off the total amount, the interest cost will rise. While cards are irresistible when you want to give gifts, they can be dangerous if you can’t resist temptation to keep buying until you are maxed out and are not prepared to pay them off right away.
Avoid dipping into the emergency fund. That money is there to take care of such things as car emergencies, leaky roofs and other bona fide emergencies. And the risk doesn’t decline simply because Santa Claus is coming to town.
Retirement savings also should be inviolate. Now matter how much your child or grandchild covets a very expensive toy for Christmas, it isn’t worth the 10 percent penalty you’ll pay, if you’re under 59.5 years old, for the early withdrawal. You’ll also lose the accrued interest on that money. If you are earning an average annual 7 percent return, that $900-plus withdrawal represents loss of about $9,600 by the time you’re 65. And there are all the Christmases to come, remember? If you use the same tactic to finance more Yuletide wishes in the years to come, the loss could be considerable.
That’s not to mention the taxes you’ll pay – about $225 on a $900 withdrawal.
It’s probably useless to advise better planning for this year, but for future reference: Set aside some cash each month in anticipation of the gift-giving season. Stick to your good intentions. Santa will thank you. When you shop, let a list be your guide and don’t get swept away in visions of your own largesse. Impressing friends and family during the holiday season won’t take away the sting when the holidays are over and your finances are in shambles. Don’t take more cash to the stores than you intend to spend.