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.

The Inability to Say No and Having Ritz-y Taste on a Econo Lodge Budget

I usually hate to give generic, common-sense financial advice that you can find anywhere on the internet. The most common is "instead of buying a cup of coffee at Starbucks, put that money into a savings account." No shit. My readers are not stupid and I'm not going to insult you by giving that kind of cookie-cutter advice.

Today's post will consist of something like observational humor, except not funny...at all (that was kind of funny, right? No? OK, I'll move on). I'll highlight some of my specific observations related to people's spending habits that drive me nuts -- especially when I see those in question complain about their finances or at least imply their struggles.

#1 - The inability to say "no" to your friends
Many people are aware that they've got financial difficulties, yet accept any invitation to spend money, as if it is OK to do it because it wasn't their idea. If you know that you're going to be short on rent for next month but your friend invites you on a weekend road trip, what should you should say? "Hell no!" Making excuses for spending money is easy. Just because it was someone else's idea doesn't mean it's any less of a poor decision.

If you're invited to spend money and cannot afford it, it's OK to say no. In fact, some of your friends and family might respect you for it. Whether the invite is direct, like "Want to go to Cancun this winter?" or indirect, like "Hey Bob -- all of us bought new Macbook laptops -- where's yours?" you need to learn to say no. There is simply no point in taking the time to come up with spending and financial goals if they can be so easily changed by some peer influence.

#2 - Ritz-y taste, Econo Lodge income
Regardless of the weakness, I see that many people have at least one. Whether it's designer clothing, organic groceries, a certain brand of electronics, or the refusal to cook for oneself, every day I see people that cannot afford their personal luxuries try to justify them. Here are some real, specific examples with fake names:

- Joe is unemployed, has a young child, no savings, and a wife working a low-paying full-time job, recently refused a truck full of free furniture from his grandmother for his new apartment because he's "looking for matching stuff."
- Devin struggles to pay his mortgage and other bills, yet goes out to lunch every day because he hates to cook and thinks it's a good way to socialize.
- Fred has thousands of dollars in credit card debt yet buys expensive designer clothes every month.
- James uses his first paycheck from his first job out of college to buy a Hi-Def TV and a Wii.
- Tom has many tens of thousands of dollars in student loans but goes to the bars with his friends every Friday and Saturday night.
- Tracy has a very low income and is unsure how she'll pay her rent for the month. Yet she refuses to do her grocery shopping at any place other than the specialized organic food store.

Am I trying to say that you can't have matching furniture, a Hi Def TV, or designer clothes? Abosolutely not. Am I saying that you can't eat organic food, go out to lunch, or drink beer at a bar? No. What I'm saying that that you cannot classify these items as affordable simply because they're mainstream and everyone else is consuming them or because you feel entitled to them. If you've got an Econo Lodge income, you can't stay at the Ritz.

Insisting on expensive habits when you cannot afford them is, in my opinion, the biggest reason that people get themselves into financial trouble. Consuming based on our personal preferences gives us a feeling of independence. It makes us feel like we're doing things our way on our terms. But in the end, the choices that we made that once made us feel so independent actually enslave us and forfeit our control to our creditors.

By saying "I'm going to go out to lunch if I want to," or "I'm going to eat organic food if I want to" or "I'm going to go drinking with my friends if they invite me," if you can't afford it, all you're doing is signing over control of your life every time you sign a credit card receipt.

It is often said that the troubles with today's economy stemmed from "securitizing" mortgages, which means taking big bunch of mortgages, putting them all in a box, taping it shut, writing "security #1" on it, and then selling it. Those who buy it don't have the details of what's inside -- just that it's got a bunch of mortgages. To me, not being aware of your individual transactions is the same thing. By refusing to analyze where and how you're specifically spending your money, all you're doing is looking at the credit card bill at the end of the month and seeing one big number that reflects the sum of your monthly spending. Without looking at the individual transactions and evaluating their impact on your big picture, you're simply asking for trouble -- just like the mortgage industry.

So before you start spending on one of your vices, create a budget to see what you can really afford. You may be quite surprised!

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?

Pork Barrel Spending in Corporations is Equally Appalling

To understand the significance of the downturn in the market, check out Sequoia Capital's Powerpoint presentation on Tech Crunch, which contains a quote near the end that reads "spend every dollar like it's your last one." Though this exaggerates the advice that I offer on this site, it's an interesting principle to consider before you open your wallet.

When you, personally, are fronting the bill for an expense, it's easy to say "no" if you feel like you're overpaying or being frivilous. But when your company is going to pay the bill, you're probably less likely to stop yourself, knowing that you can just "expense it."

Employees in come companies legitimately think, because they're traveling for business, that expensive dinners and hotels and plane tickets and car services and luxury retreats are consumables to which they are entitled. Somehow the fact that the company is going to pay the bill excuses them from making financially sound decisions that are in the best interest of the shareholders. The same goes for over-the-top construction, decorating, and other unnecessary eyes-closed, blank-check spending.

Not all companies are guilty; I actually believe that the company I work for does an excellent job of exercising thrift. However, I find it sad that employees in other organizations that expense extravagant happy hours and meals and hotel rooms are doing a horrible disservice to the actual owners of their companies. All employees of a corporation have an indirect fiduciary responsibility to their stockholders, even if that relationship is separated by many degrees.

It's easy for John McCain and Barack Obama to criticise the government for its pork-barrel spending. Americans hate to see their tax dollars wasted. But the truth is that much of our retirement money lives in corporations. Why do we not hold them accountable for their inefficiencies and outrageous spending (does the AIG $400,000 retreat ring a bell?)?

Every time a client is taken to Morton's instead of Panera; every time a consultant stays at the Marriott Marquis instead of the Comfort Inn; every time a quarterly meeting is held in Las Vegas instead of corporate headquarters, the bottom line is knocked down another notch. And the more corporations whose bottom lines are affected, the more affected are those whose retirement accounts are in mutual funds.

My grandmother has her life savings in her IRA, which is losing money like it has holes in its pockets. I understand that frivilous business expenditures aren't the main culprit that got us into the crisis we're in today, but they're his first cousin. I believe that outrageous senses of entitlement and a complete lack reasonable, responsible financial behavior, on behalf of both individuals and corporations, are to blame.

I welcome and encourage your anonymous comments about outrageous corporate spending that you've seen in your career.

Reevaluating my Rewards Card

I've sworn by my rewards card since the day I had it. But a friend of mine and reader of my site named Steve emailed me the other day to talk up and recommend his own strategy. On this site, I try to be a big proponent of reevaluating our spending and habits, so I knew I'd be a hypocrite of I didn't at least check out his plan and contrast it against my own. Here's what he said:

I've got a schwab account for everyday checking that has the same benefits as the e*trade. Then i automatically send rent/utilities/insurance to a wachovia account and a percentage to a ing direct account for savings.

I use a chase freedom for gas/groceries/utilities for 3% cash back, and I have an Amex that's linked with my corporate amex for everyday expenses that gets points i can turn into airline miles or hotel points.

I've got to say that Steve has a great setup. A benchmark for rewards is about 2% -- anything more than that is tough to come by. And if those rewards are CASH then it's an even better deal.

Before I go any farther, let me reiterate a point I made a couple of months ago and say that unless you pay off your balance in full every month, you shouldn't use a rewards card. They tend to have higher interest rates than non-rewards cards, so in the long run, those rewards might actually cost you a lot of money.

When you're picking out a rewards card, try and figure out what the actual value is of your reward. Cash is easy; points, not so much. If your card offers points instead of cash, figure out how much each of those points is worth in terms of cash and then make your decision. I use my Choice Privileges rewards card, which earns me free stays at Choice hotels. Here's how my points work out:

I earn two points per dollar on everyday purchases that I put on the card. So how much is that worth? I just looked at their online booking system and found a hotel room that would cost $150 per night plus tax if I paid for it, or 6000 points if I used my rewards. To earn 6000 points, I would need to spend $3,000 on everyday purchases (two points per dollar). So if $3,000 in everyday spending gets me $150 worth of hotel rooms, that means that my points are "worth" about five percent of my everyday spending. That's a bit nicer than a one, two, or even three percent cash back card.

I'd say that I travel slightly more than the average American, so I never have trouble using my points whenever I do. Yes, cash back is usually better than points because it has more utility (you're not limited in where you can spend it), but if you can earn twice as many dollars' worth of free hotels than you could dollars' worth of cash, it pays to have the points as long as you would have otherwise paid for those rooms at some point.

Steve also mentioned that he uses his American Express card so he can pool his points with his business expenditures. That's another great idea. Because points are essentially useless until you reach a threshold at which they can be redeemed, it's best to earn them in a place that has more than one "input." A second business card earning you points is a great example of this.

With my rewards card, I don't just earn points from everyday spending. I also get three bonus points per dollar spent at Choice hotels. I travel a lot for business -- sometimes for months at a time -- so these really add up with weekly (reimbursable) bills that often exceed $500. Additionally, these same hotel points can be earned by anyone that signs up, regardless of their method of payment. So Joe Schmo can sign up for an account online, make a reservation, and earn about 10 points per dollar spent, even if he pays cash. This is similar to frequent flyer miles -- anyone can sign up and earn them when they fly, but frequent flyer cardholders earn extra.

So how quickly do my points add up? Let's say that I spend $500 on a room for a weeklong business trip. I'll earn a) the 10 points per dollar that I automatically get for being part of the program, b) the two points per dollar that I earn for everyday purchases on my card, and c) the three bonus points per dollar that I get for spending money at a Choice hotel with my card. That comes out to be 15 points per dollar. Multiply that by the $500 that I spent, and I just earned 7,500 points -- more than enough for a free $150 night.

Choice also runs seasonal promotions that you see advertised on TV pretty often (does the Johnny Cash song ring a bell?). They just finished doing their "triple points" promotion, that will triple the normal 10 points per dollar. Also, because I have spent more than 40 nights at Choice hotels this year, I personally earn four extra points per dollar. So If I spent that same $500 during a promotional period with my preferred status, I would have earned 39 points per dollar, earning me 19,500 points, enough for more than three free nights at a $150/night hotel (assuming 10% tax, that's worth $495). That comes out to be virtually "buy one night, get one free!"

So my rewards card gives me 5% worth of free hotel rooms for everyday purchases. And because those points are going into an account that has multiple inputs, I can use them much faster. Other examples of these types of multiple-input accounts are Airline rewards, which deposit miles into your already existing frequent flyer account, or grocery rewards at specific chains that deposit points into an account that was opened with your little keychain grocery card.

So I'm generally a fan of getting a rewards card that gives non-cash rewards as long as two criteria are met: 1) the value of the non-cash rewards is significantly more than the amount of cash you could get back on a cashback card and 2) the non-cash rewards will be spent on something that you would have otherwise paid for in the future, like hotel rooms, plane tickets, groceries, etc (NOT random crap in an all-points Sharper-Image-like catalog).

As far as my friend's banking choice goes, I have to say that it's a wise one. The 3% interest is high and it has no minimum balance. Today my E*Trade pays me 2.8% on my checking and 3.3% on my savings, with a $5,000 minimum balance on the checking account. Technically, the Schwab account is better than my E*Trade account because it doesn't require a minimum balance. However, I like the fast transfers to my brokerage and IRA accounts that I hold with E*Trade. Though there would technically be value in switching my account, it would be too small to justify the effort of switching.

If you're choosing a rewards card of your own, look for the best offers and try and figure out where you spend most of your money. Use Mint.com to determine this, as they'll tell you how many times you've visited a particular business and how much you've spent there. That'll be a good place to start when determining which rewards card is best for you.

Thanks for your comments, Steve.