Preventing the January Spending Hangover by Controlling Holiday Spending

Much like drinking, spending in excess during the holiday season can give you a nasty hangover in the following months. Not long after we make our financial New Year's resolutions, we're faced with bills that can tumble our annual goals like a Jenga tower. So before you make the trip to the mall or navigate to your favorite online store, make sure that you know your tolerance for spending. And if you're already carrying a balance on your Visa, you're a lightweight and should sip rather than gulp when passing your plastic to vendors.

Take a look around your house. Or if you have one, look in your attic or in your garage. How much crap do you have laying around that simply takes up space and is never used? If your house is anything like ours, you're probably overwhelmed. Somehow all of those "useful" little gadgets like foot baths, back massagers, golf-themed desk ornaments, ugly sweaters, and wall-mounted singing fish have lost their holiday luster. Chances are, those for whom you're buying gifts this season have their own similar stockpiles of Chinese-made widgets that outlived their usefulness by January 10th of the year following that in which they were given. Turn things around this season by giving reasonable gifts that neither waste your money nor beg to be dumped in storage by your family and friends.

Here on Tepom.com, I've always been a proponent of planned and controlled spending. This is especially important during the holidays. All too often we decide to wing it with gift giving, buying whatever for whomever we deem important in a valiant -- yet irresponsible -- effort to be extraordinarily thoughtful. But just as we should create a spending budget each month for groceries, restaurants, and travel, we should plan ahead of time for our end-of-year gift giving extravaganza. Here are a couple of easy ways to do so:

Don't be afraid to buy a Christmas gift in the summer
If you're out shopping in the spring or summer months and see something that reminds you of a friend for whom you'll most likely get a Christmas gift, buy it. There's no rule that says there needs to be snow on the ground to buy a holiday gift. By buying early you'll avoid the pressures of last-minute shopping and hopefully avoid the default Applebees gift card. You'll also spread out your spending throughout the year.

Save regularly and specifically for gifts
An old coworker of mine had a great system for saving for the holidays. He set up a regular savings transfer every month though his online banking. Twice a month, on payday, he transferred $75 to a special account designated for Christmas gifts. Though it was tough at first to part with the $150 per month, it made the price tags of the PS3s, iPods, and new bikes much easier to swallow.

Social pressures are another reason that we spend too much during the holidays. Honestly, I believe that we put way too much thought into how others will judge our gift giving. We may want to impress someone with a lavish gift. Or we may feel obligated to spend a certain amount on someone because we spent a higher amount on another person. Or we might want to wow our obscure friends and colleagues with an incredible bout of thoughtfulness by remembering to buy a gift for everyone that we've ever shook hands with. Here are a few tips to handle the social pressures of gift giving:

Look out for #1
It's only natural to want to show off a little bit with our purchases, whether they're for ourselves or our loved ones. And as much as we like to impress our friends, coworkers, and family members with expensive gifts, we only hurt ourselves if we can't really afford expensive gifts. So before embarking on your holiday shopping adventure, remember that impressing others comes at a cost. No one over the age of twelve will think any less of you for being financially responsible with your gift giving. And furthermore, before over-extending yourself with a gift for your boss, remember that he knows how much money you make!

Check reciprocity and equality at the door
This is one of my biggest pet peeves when it comes to Christmas. During a season when we're supposed to be focused on family and love and peace and all that stuff, many of us are too focused on equality and reciprocity of gift values. "If my brother's gift cost $50 and my sister's gift cost $30, then I need to spend another $20 on my sister." Bullshit. Unless you're giving all of your grandkids a card with $50 in it, you can easily overdo it by trying to achieve total equality. "Well, my friend bought me a $50 gift card, so I need to spend at least $50 on her." Horseshit. You should buy gifts for your loved ones that you think they'll appreciate and enjoy. Don't get them gifts just to even the scales. The more we steer our holiday values toward consumerism and dollars and cents, the further we migrate from the true values of the season.

Send Christmas cards
Some of us more than others can bring thoughtfulness to near-obsessive levels. Wanting to think of everyone, we may buy small gifts for everyone in our Rolodex. And sure, they'll be thankful for us thinking of them, but the costs can really add up come New Year's. Instead of getting a gift for each of your coworkers, your spouse's coworkers, and all of your family friends, fill your outbox with Christmas cards. For less than a dollar apiece, you'll remind your life acquaintances that you care and you're thinking of them. Truth be told, not everyone expects something from you. So when you send your cards in lieu of gifts, think of it as going above and beyond.

The holidays are a fun time of the year during which we eat, drink, and spend a little too much. But by planning ahead of time and controlling your gift spending, you can reserve your brainpower in January for figuring out how to work off those December love handles rather than how to pay off that looming credit card bill. When it comes to buying gifts, don't put more pressure on yourself than your wallet can handle. After all, the holidays are about being with each other, not buying for each other.

Coping with a layoff

As of October, the national unemployment rate in the United States is 6.5%. And of those unemployed, one in five have been out of work for more than 27 weeks. So how are you feeling? Are you sitting fat and happy in a plush government job or working on on a sexy, profitable project? Or are you watching your co-workers resign one-by-one or -- even worse -- get laid off in large groups? If you are in any way starting to get a little nervous about losing your job, be proactive! Prepare yourself financially and do whatever you can to keep yourself on the payroll and out of jeopardy. Here are some tips:

1. Prepare your finances
If you're anticipating a layoff, you'll need to do all that you can to make sure that you've got cash in the bank that can cover several months' worth of expenses -- let's say six or seven. Once you've accumulated a pile of green, between unemployment and your savings, you'll be sitting pretty while you look for another job. If you already have that money sitting in the bank, you're clearly a financially responsible person and should probably be visiting Edward Jones instead taking advice from the likes of me.

The easiest way to start saving a bunch of cash is to start living (and spending) like you are unemployed while you are still employed. And do it to a degree equal to that which you're anticipating a job loss. The specifics of determining the likelihood of getting laid off will vary greatly, as anyone that isn't on a contract can be let go at any time, regardless of how long they've been employed, their seniority, etc. But trust your gut here -- though many people are caught off-guard, many more get "that feeling" when they might be in trouble.

So if the future of your current job is very uncertain, fix your budget to ensure that you and your family are as cash-rich as possible. Be sure to consider and adjust two dimensions of your finances: where you're spending and where you're saving.

As far as spending is concerned, start with the big stuff and then work your way down. Postpone your expensive vacation if it isn't already paid for. Don't overdo it with Christmas gifts. Hold off on the HDTV purchase. Delay any of your plans to spend a lot of money on anything non-critical until you're assured of your job security -- whether that assurance comes from your old boss or a new one.

Once you've abandoned the notions to spend lots of money, look at the little things. Start shopping at Walmart instead of Whole Foods (believe me, I know that's difficult for some of you). Downgrade your TV service. Put XM or Sirius on hold and stop going to coffee shops. These little things may seem obvious, but they're important. Look at all of the ways that you spend money, analyzing each one to come up with a method to reduce your spending. You won't always have to live like this, but spending like you're penniless while you're still enjoying a paycheck is critical to accumulate the cash you'll need to stay afloat after a layoff.

After your spending is reduced, it is then important to to analyze where you're saving your money. Why? Because bracing yourself for a layoff is all about liquidity -- ensuring your money can be accessed at the drop of a hat. Cash is the most liquid asset. Your home and specialized savings accounts are much less liquid because a lot more is involved in turning them into groceries or money that can pay bills.

Depending on the degree to which you're concerned about a layoff, consider cutting the amounts that you regularly contribute to a retirement or college savings account. Contact your HR representative and ask about reducing your contributions to your 401(k) -- most let you do that quite easily. Once you're back in the saddle, bring your contributions back to a normal level. But if you're short on cash -- especially during uneasy times -- it's better to have that money in-hand than put away for retirement (again, liquidity). But be careful: If you're going to take money from your retirement, it's much better to simply stop or reduce your future contributions. Don't cash out the money that's already in your 401(k) -- you'll end up paying through the nose with taxes and a 10% penalty.

If you're paying off an auto loan or a mortgage early, pat yourself on the back, but take a breather while you're building your reserves. Once you're assured of your current job security or find a new employer, you can play catch-up with all of the cash you've got laying around. And I hate to say it, but if you've got lots of credit card debt and are facing a likely layoff, I would rather see you with enough cash in the bank to pay the minimum payments on those cards if their balances is greater than your bank account balances. Though it's not ideal to pay interest for a few months, it's better than destroying your credit.

Finally, be careful when anticipating a severance package at your current job. Don't take anything for granted unless it's in writing. All too often people underestimate the impact of a potential layoff because they wrongfully believe their company will provide a severance or separation package. Unless it's already in ink, do yourself a favor and don't rely on it.

2. Step up at work
Aside from getting your personal finances together, be sure to perform at your absolute best at work. If only a few positions are being eliminated, don't give your boss a reason to let you be one of those that is let go. Be outstanding, proactive, and flexible. A good friend of mine works for a major newspaper and was able to avoid getting laid off along with many of his ex-coworkers by doing these three things. The paper was moving in a new direction, and he proactively came up with new ideas for how he could support the new model. The new model would require him to perform many different duties (moving from print to the web) which he accepted with enthusiasm the a promise of his flexibility. And because he wanted to stand out, instead of sucking up, he always did outstanding work.

If you still get laid off, you'll maximize the amount of time you can get by without a paycheck by adjusting your finances. Stay on top of receiving your unemployment benefits. While you're looking for a new job, have an intelligent friend proofread your resumes and make sure you customize it for each position. Never miss an opportunity to apply for a job. Write down all of the companies in your city that are hiring and check their websites every day. And don't forget to browse Craigslist's Jobs section!

Also, don't neglect networking. Accept every dinner invitation, attend local alumni and professional events, and volunteer wherever you can. Most jobs are given to people with connections, and by leaving no social or professional stone unturned, you'll improve your chances of meeting your career's benefactor. This is also the perfect time to reconnect with old friends and coworkers.

Have you had experience with getting laid off recently? How have you prepared yourself? How well would your finances stand if you were laid off today?

Where to put $1000: Starting a Lifetime Habit of Saving with a Cool Grand

First let me say that I encourage commenting on my site. I often receive requests for topics via phone calls, emails, or today, Facebook chats. If you ever have a question related to investing, paying down debt, or planning for the future, I welcome anonymous comments and promise to respond promptly.

So you've got a thousand bucks. Where do you put it? Today's post will talk about what you can do with that money instead of spending it. I will give you options based on priority. The options begin with keeping the money close in a savings account, then paying off high-interest debt, saving for retirement, and then investing in the stock market.

Where you should put your thousand dollars depends on who you are:

If you're Bill Gates, you should give it to charity. If you're Joe the Plumber, you should save it to buy your boss' business. John McCain should spend it on campaign ads. Barack Obama should save it for a moving truck, because I've got the sense that he'll be moving to Washington before long. But I digress...you're the one with a thousand dollars.

First of all, let me congratulate you on making the commitment to start saving. Like commiting to lose weight, deciding to save money is a wise decision that will enhance your life, boost your conficdence, and never be regretted.

Where to put your first cool grand is going to start with your financial plan. The highest priority that I recommend in any financial plan is to have a reasonable cash balance before putting money anywhere else. Deposit the thousand dollars that you have in your pocket in a cash account that is easily accessible, like an interest-earning checking or savings account. No, you won't get rich quick, but you should still keep it as close as you can without putting it under the mattress. Here are two reasons why:

1) It is in your best interest to have more cash available than you need on a monthly basis. Some say that it's a good idea to have three, four, five, or even six months worth of expenses in cash. I don't necessarily agree with six, but I could be convinced that three is a good idea. Extra cash is important because annoying financial circumstances arise all the time, and without a buffer, those annoying circumstances are likely to put you into debt. Two weeks ago, my car needed an unexpected repair that cost me $420. If I hadn't had the cash to pay for it, I may have had to borrow the money from a friend or, even worse, a credit card company. Keeping extra cash in the bank is essential to prevent those annoying, yet inevitable, financial inconveniences from becoming financial disasters.

2) The other reason to save money in a cash account is purely psychological. Though you're not going to get rich earning 3% interest, you'll never lose anything, either. Over the past few months, my stock portfolio has decreased about 35% in value. If you put your first thousand dollars of savings into the stock market and end up losing a third of it, you may be discouraged from saving in the future. Before investing in stocks or mutual funds, build up a stable collection of cash that will grow slowly, but surely.

So my first piece of advice about your thousand dollars is pretty simple. Put it in a slow-growing savings or checking account (check out a Schwab or E*Trade checking account) so that the money is accessible if you need it. Once you've built a nice cash reserve, it's time to look at debt.

Notice how my first priority was to build up a small cash reserve before looking at credit card debt. If you've got some cash in the bank, before putting your $1,000 anyplace else, use it to pay down/eliminate any credit card debt that doesn't have a low promotional interest rate (0-4%). Credit card debt is a real leach when it comes to personal finance and it should be eliminated before investing your in-hand money anyplace else. Start with the card with the highest interest rate and then work your way down.

If you've got a thousand dollars to invest and already have a cash reserve that you're comfortable with and no credit card debt, then I'd look into putting it into a Roth IRA. Why a Roth IRA? Well, it's a tax-advantaged retirement account into which you deposit cash-in-hand. Your other retirement options, like a 401(k) and a traditional IRA deal with pre-tax money; if you have $1,000 in-hand, it's after-tax money and can only be deposited into the Roth IRA retirement account. E*Trade, Vanguard, Fidelity, and many more companies offer Roth IRA accounts. Check out the no-load, no fee mutual funds (preferably one that is tied to an index, like the S&P 500), as they have the lowest overhead costs and tend to perform just as well as more expensive managed funds (the ones that charge you fees to employ a manager that tries to beat the market, but rarely does). If you're under 50, you can deposit up to $5,000 per year into a Roth IRA. Those 50 and older may contribute $6,000 per year.

I could go on and on with additional investment advice related to stocks, CDs, money market accounts, or retirement. But we're talking $1,000 here. In summary, if you have an extra pile of cash sitting around, whether it's $100, $500, or $1,000, here's what you should do with it:

#1 - Make sure you've got extra cash in your checking/savings account that you can easily access.
#2 - Once you've got a little extra cash in the bank, use the money to pay down/off any credit card debt that you have, starting with the highest interest rate (not the smallest balance).
#3 - When you have no credit card debt, open a Roth IRA or contribute to one that you've already opened. Be sure to invest in no-load, no-fee funds, as they have very low costs and tend to perform just fine. Look for funds with a Net Expense Ratio under $.50.
#4 - Only after saving up some cash, after paying off high-interest debt, and after putting the maximum amount into a tax-advantaged account should you consider investing any serious amount of money in stocks. With a Roth IRA, your gains will never be taxed. With stocks, all of your gains will be taxed.

If you've made the commitment to start saving, pat yourself on the back. You won't regret the decision to live a financially healthy lifestyle.

Three Parts of a Practical, Effective Budget

Many times I've recommended creating a personal budget to help you meet your financial needs. It doesn't sound too difficult, does it? Believe it or not, the hardest part is finding the discipline to stick with it and give it the care and feeding it needs to be effective. It's easy to add up your income and divide it across all of your expenses/savings goals. But budgeting is more than that. In this post, I'll tell you the three important items that you'll need to have an effective budget: a Budget "Thermometer," Running Total Tracker, and Cash Planner.

1. Budget Thermometer








Here is a sample of my budget thermometer for September. It is simply a screenshot from my favorite free personal finance software, mint.com.

Coming up with categories and their monthly allowances is an important first step and the part of your budget that you will pay the most attention to on a daily basis. Mint.com not only allows you to create your budget, but it will show you a daily thermometer to display how well you're adhering to your plans. Because it's integrated with your bank and credit cards, each day it will classify your spending transactions and tell you whether or not you're on track to meet your monthly goals. If you spend half of your grocery budget by the 5th of the month, Mint will alert you so you can rein in on your shopping until you're back on track. As you spend money in a category, your little "thermometer" will fill in. Its color will change if you're on pace (green) , not on pace (yellow), or over your monthly budget.

I can't tell you how to split up your income each month, but here are some tips:

- Before creating your categories and their associated monthly allowances ($500 on groceries, $200 on restaurants, etc), take a look at where you currently spend your money and don't just pull the numbers out of thin air. If you're using personal finance tool like Mint, Quicken, or Money, you should be able to see a pie chart that shows you how you've spent your money in the past. But make sure your past transactions are classified correctly!

- Next, establish new goals for each of your categories. It's OK (and encouraged!) to spend less each month in certain categories than you have in the past. If you spent $400 last month at restaurants and want to bring that down, this is the perfect time to set those goals. Make sure you're using reasonable and achievable estimates for everything, but don't be afraid of a challenge.

- Don't forget about your savings goals! If you're saving up for something specific like a vacation or an engagement ring, start implementing those goals into your budget as categories after you've figured out what you'll have left over. Whether it's $10 per month or $500 per month, it's important to put money away for the things you'll need in the future.

- Don't budget down to your last penny. We're dealing with your personal finances; you're not an accountant. I like to leave out 2.5% of my monthly net income (after-tax pay) unaccounted for. There's no doubt that at least one of my expense categories will go over one month (as you can see above), so it's nice to have a little buffer for such an occasion without throwing off my other goals.

- If there are expenses that aren't incurred monthly, like car insurance or, in my case, my dog's annual vet visit, split them up in terms of months. Divide your six-month premium by six and use that as your monthly budget. This, of course, means that you'll be under budget some months, and over budget the months that the expense is paid. This point illustrates the need for the other two pieces of an effective budget: a Running Total Tracker and a Cash Planner.

2. Running Total Tracker
Unless you're an incredibly disciplined, you're not going to spend exactly the same amount of money each month on all of your categories. Certain things like your car payment, mortgage, etc are fixed, but other expenditures like groceries, clothing, and utilities will vary a bit. This is why it's important to track running totals.

Mint does not have running total tracking functionality, so I do it myself once a month in a spreadsheet. Two of my columns are identical to my categorical budget columns that are tracked by my personal finance software. One column has the identical category and the next has the monthly budget. Each month, I evaluate my monthly adherence to my budget and note the amount that I was over or under for each category in a new column; I have columns for each month that I have been using the spreadsheet. If my restaurant budget is $140 and I only spend $90 in September, my September column would have a green "$50" because I spent $50 less than budgeted. If I had spent $150, my September column would have a red "$10" because I spent $10 more than budgeted.

Next to the first two columns that display spending categories and their monthly allowances, I have a third column with a number that is either red or green. This number represents the sum of all of the monthly over/under amounts, which I call the "running total."


The running total is important for me to know how well I'm adhering to my budget over time. Also, it keeps track of the balances of certain non-monthly expenses and can help when you create next year's budget. If you see that you're constantly spending more than your budget on gas or groceries, you might need to rethink your amount.

Additionally, the running total column can indicate whether or not my wife or I can afford greater than normal spending in a certain category. Recently she said she wanted to go clothes shopping. We hadn't spent any money on clothes in a few months, so when I checked our running total for clothing, I saw that we were about $123 in the green. Because we hadn't spent our $50 clothing budget in a few months, she was able to go and spend more money on clothes this month. When I update my spreadsheet next month, the running total will be back to zero.

3. Cash Planner
Our incomes and expenses aren't always regular and incremental. There are times of the year when we receive bonuses or incur extra costs. The third piece of budgeting is important to help you determine how much cash you'll have after receiving irregular income (possibly after getting your tax refund) and after paying your abnormal expenses (like the January post-holiday credit card bill).

This budgeting tool is also something that I track manually in Excel. Across the top are columns indicating two periods per month -- one ending on the 15th and the other on last day of the month. It's up to you to determine how small your time increments will be. Depending on how often you're paid, you can have columns represent every Friday from this day forward, or simply the end of the month.

For each column, I have a series of rows for my expenses and incomes. My income is a row and my wife's is another. My expense rows resemble my budget categories, but unlike my running total spreadsheet, they don't follow them explicitly. This is because not all of my expenses are paid on the same day of the month. Many of them, like groceries and my XM bill, are put on my credit card. Since my credit card bill is due only once per month, I have a single row for "credit card" that includes many of my regular expenses. Other expense rows include one for my mortgage, my car loan, and my student loan payment.

Two other important rows include "Additional Income" and "Additional Expenses." These will be places where you can input anticipated fluctuations in your income or expenses. If you know you're planning on spending $350 next month on your quarterly student loan interest, you can plan for that. If you're getting a big tax refund in the spring, put that in your April column. Add as many columns as you're comfortable with. If you want to plan out six months ahead, you may. If you only want to plan two months ahead, that's fine, too.

Next, for each period column, I enter the expected amounts for each row (if any) that will be applied during the period. For example, my mortgage and car payment are paid on the 10th of each month. For the column labeled 10/15 (representing the period from October 1st - 15th), I will enter the amount of my monthly mortgage and car payments as well as any income I expect to receive. Since my credit card and student loan payments aren't due until later in the month, those expenses will show up in the second column for the month, 10/31. Similarly, because my wife is paid only at the end of each month, I'll enter her income only for the second period.

At the bottom of each column, I do a little math to estimate my cash balance. I take the cash balance from the bottom of the previous column, add the incomes from the current column, and then subtract the expenses from the current column. This will result in my new expected cash balance for the period. For example if I had $5,000 at the end of the last period, received $1,000 of total income, and incurred $800 of total expenses, my new cash balance would be $5,200.

While the Budget Thermometer and the Running Total tracker are useful for tactical budgeting, the Cash Planner is great for strategic cash management. If you're trying to develop an emergency fund of a few months' salary, the cash planner will give you a good idea of how long it will take to reach your goal.

As you can see, there's more to budgeting than just coming up with monthly allowances for spending categories. To budget effectively, you must have reasonable monthly goals (derived from your past spending), the ability to monitor your adherence to those goals, a willingness to log your monthly adherence (running totals), and a view into the future to know what your financial situation will be and how soon you can achieve your goals.

What are your own personal budgeting strategies?