Staying on budget over the holidays

You might overspend because of “wealth effect”, or to keep up with the Joneses, but Morningstar’s Christine Benz has some ideas on how to not go over your budget

Ruth Saldanha 27 November, 2019 | 12:32AM
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Ruth Saldanha: The holiday season is right around the corner, which for many people means that spending is going to ramp up whether it's on gifts for loved ones, party supplies, decorations or anything else. A lot of us are going to feel the pinch financially speaking at this time of year, but how can we make sure that we don't go overboard? Christine Benz, Morningstar's Director of Personal Finance, is here to help.

Christine, thank you so much for being here today.

Christine Benz: Ruth, it's my pleasure.

Saldanha: It seems that people tend to spend a lot more around the holidays. Is this true? And why is it?

Benz: Well, I think it is true and there are a couple of reasons. One is that it's fun to spend. Obviously, there's a lot going on around the holiday seasons, parties and gift-giving and so forth. Another thing that I think can come into play is, as we earn more, we tend to experience a little bit of lifestyle creep. So, we tend to spend what we earn and as we earn more in our paychecks, we tend to just send that money out into various expenditures. And then, another thing that I think is relevant right now is that we've had strong performing markets, especially stock markets. And that has the net effect of stoking kind of a wealth effect. So, if you're looking at your retirement portfolio balance, chances are if you've got stocks in that portfolio, you've seen an enlarged balance. Even if your paycheck hasn't changed, that might make you feel wealthier and more inclined to spend overall.

Saldanha: What are some of the things that we should keep in mind when we're spending at this time?

Benz: Well, I think one thing that you want to keep in mind is, some research that comes from our colleague Sarah Newcomb, who focuses on behavioral finance for us at Morningstar, and Sarah's research has indicated that people who compare themselves to others, and we tend to do that around the holiday season where we see, well, my neighbour gave his wife a car or our other neighbour is taking their kids on a worldwide cruise, whatever it might be. We tend to compare ourselves to others and to their spending. And that spending that is stoked by keeping up with other people does not contribute to our overall sense of wellbeing. So, not only will be poor having made those expenditures, but we may also be less happy. So, keep that in mind, the relationship between spending and your sense of wellbeing. They may not be connected at all.

Saldanha: To get over this does it make sense to build a budget and what should go into a holiday budget?

Benz: I think it does make sense to come into the holiday season knowing what you can spend, and really thinking about how much you can realistically spend without having to resort to unattractive forms of financing whatever you're spending money on. So, you don't want to have to go into credit card debt, so only put as much on your credit card as you can realistically pay off in that month. Definitely, don't delve into retirement assets or your emergency fund to cover holiday gifts. Keep within what you can spend within the next month or two. And let that help determine how much you can spend on gift-giving and hosting parties and whatever else you might be doing.

Saldanha: Are there any tips to ensure minimizing financial stress around this time of year?

Benz: Well, I think one thing I would call out is some of the research that we have seen on happiness and spending. And the key takeaway is that spending on stuff by and large does not contribute to happiness. The type of happiness that is insured with spending or is often contributed to with spending, is spending on experiences. And the good thing about that is that that can also be really helpful from the standpoint of budgeting. So, say, you're a parent of young children, maybe you give a couple of gifts that are related to some experiences that you'd like to dole out in the year ahead. So, maybe you're going to take a couple of family trips, connect the gifts to the trips. And so, from the standpoint of budgeting, that works really well, because you're not incurring big expenditures just around the holiday season, you're sort of spacing them throughout the year. But the other important thing that we know about happiness is that looking forward to things really contributes to happiness as well. So, you're also giving your family members or your loved ones that gift of something that they may look forward to in the future and that you may look forward to as well.

Saldanha: Thank you so much for being with us today, Christine.

Benz: Thank you, Ruth.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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