How to Make a Holiday Budget

The winter holiday season may be the happiest time of the year but for many Americans, it can also be the most expensive. Avoid overspending with this 5 step guide to creating a realistic holiday budget and other essential holiday budgeting tips to keep your finances merry and bright.

Create a holiday budget

Step 1: List all potential expenses

Include anything and everything you might need to spend money on for the holidays. The more detailed, the better. Your list will probably include things like:

• Gifts for friends, families, work events, and holiday parties (e.g. White Elephant gift exchange)
• Gift wrapping supplies (Paper, ribbon, bows, gift tags)
• Shipping costs
• Holiday food (special purchases beyond your normal food budget)
• Tips or bonuses for service workers (e.g. postal workers, teachers, employees)
• Holiday cards (e.g. photographer, printed cards)
• Travel
• Attire

Each of these is a category and you’ll need to create a holiday spending budget for every single one. But don’t worry about numbers just yet. Simply seeing a complete list of all your potential expenses is a useful reality check that shows just how far your holiday budget needs to stretch.

How to create a budget and stick to it »

Step 2: Determine spending limits

A top-down approach is best when figuring out how much to budget for the holidays. This means first establishing a total spending limit; a number that should be based on money that’s already been saved, or can be paid off within one billing period.

Next, work backward to determine specific spending limits for each expense listed in Step 1. Start with the highest priority costs that are non-negotiable (like flying home for the holidays). Assign number values to each category and subtract those amounts from your total spending limit as you go down the list.

Not sure where to start with the numbers? Review receipts and bills from last year’s spending to get a realistic idea of what was spent for the previous holiday. These numbers are a reliable estimate of what you can anticipate spending this year. Digital budgeting platforms make this easy to keep track of without having to save and sift through piles of paper.

Read: Smart Personal Budgeting Tips

Step 3: Analyze your gift giving

Create a thorough breakdown of gifts by listing out every single person on your list. Some less obvious gift recipients might include extended family, friends, co-workers, neighbors, or your children’s teachers.

Next, list the cost of a specific gift you had in mind for each person – if you don’t already have a gift picked out, pick a general range. Tally these totals and compare them to your total gift budget and adjust as needed. If you find that you’re over budget, you’ll need to give fewer gifts or choose less expensive ones.

Step 4: Revise your holiday spending budget

If your total budget is spent before getting to all the items on your holiday spending list, you’ll need to make a choice, either:

• Lower the anticipated spending amounts on your higher-priority expenses
• Eliminate the categories that your budget couldn’t accommodate
• Increase your total budget

If you’re not willing to sacrifice how much you’ll spend, the best way to avoid taking on holiday debt is to focus on increasing your available cash to spend. This can either be done by increasing your income, such as getting a temporary seasonal job or increasing your access to credit.

Step 5: Open new credit wisely

Getting a loan or opening a new credit card to help fund your holiday spending can quickly lead to financial trouble if you don’t do so with a plan.

Look for low or zero-interest offers. These will give your finances more time to recover from the holidays and won’t cost an arm and a leg if you carry a balance. Avoid high-interest options like payday loans which can quickly spiral into huge debts if you don’t pay them off immediately.

However, you’ll still need to be careful to avoid debt even with a zero-interest line of credit. In most cases, these credit offers involve deferred interest, meaning that your balances accrue interest every month, you’re just not charged them.

Failing to pay off the balance before the end of the promotional period or missing a minimum payment will result in you being charged for all of that interest during this period. For this reason, it’s also important to only spend as much as you’re certain you can afford to pay off entirely by the end of the promotional APR period.

Read: Pros and Cons of Getting a New Credit Card Before the Holidays

Tips for sticking to your holiday budget

Now that you’ve made a holiday budget, it’s time to put it into action. These tips can help you stick to your holiday spending plan and avoid overspending during the holidays.

• Keep a running total of all your spending. Real-time budget tracking will alert you when you’re close to exceeding your budget before it’s too late.
• Save all your receipts. Use these to create a holiday budget for next year.
• Start saving for holiday spending early. Set aside money throughout the year so you’re not scrambling to find cash once the holidays begin. Open a high-yield savings account or CD to help stretch your money even further.
• Know who’s getting what in advance. Even if you’re not sure of the specific gift you’ll be giving to each person, having a general gift category like toys, electronics, or cookware in mind can keep you focused while shopping and prevent impulse buys.
• Always shop with a list. It’s easy to forget a paper list at home. Instead, create a digital list that you can access on your phone at all times. Digital shopping lists may also allow multiple people to access and edit, ensuring everyone has an up-to-date holiday shopping checklist.
• Shop with cash (and leave your cards at home). You can’t overspend what you don’t have. Opt for shopping with cash to avoid being tempted by holiday shopping that’s not on your list.
• Consider using PayPal or prepaid credit for online purchases. The holidays are a prime time for identity theft. Using a third-party payment prevents thieves from gaining direct access to your credit and debit cards.

Using a credit card for holiday shopping: Strategy & Tips

Most people depend on credit cards to cover at least a portion of their holiday expenses. If you’re planning to use credit during the holidays, you’ll need a game plan to minimize debt and maximize rewards, namely, deciding which credit cards you’ll be using.

If you have multiple credit cards, know ahead of time which to use for each area of your holiday spending plan like food, attire, travel, and gifts (refer to your gift breakdown in step 4 to map out where you’ll be shopping). Here are a few things to consider when deciding which card to use where:

• Rewards/bonuses: Many credit cards offer rewards for purchases in specific categories like gas, grocery stores, or travel. Review your card benefits to determine if there are any retailers on your list that would qualify for those rewards.
• Interest rate: A low credit card APR is ideal for large purchases that may leave you with a balance. This is a great catch-all card to use for any purchases that don’t fall into any other reward purchase categories.
• Flexible payment options: Credit cards sometimes offer alternative repayment options which allow large purchases to be paid off in multiple payments at a reduced interest rate. This can be a helpful alternative if you don’t have a low-interest credit card available to you. Co-branded cards (credit cards associated with specific brands or companies) like those from Apple, Best Buy, and Amazon, offer this benefit for large purchases made at their stores. If you own a store card, check its benefits to see if yours has this perk as well.
• Shopping offers. Many credit cards have deals that provide statement credit for purchases made at popular retailers. To find them, log into your credit card account portal. From there you will need to activate the offers and make the purchase before the listed expiration date. You could easily save up to 15% at stores you were already planning to shop at.

Be careful with store credit cards

These cards tend to have relatively high interest rates even compared to other credit cards. It’s rare to see a store credit card that has an APR of less than 20%; many go much higher than that. They may also have stricter terms on repayment.

Unless you’re earning good rewards AND you can pay off the balance in full within the billing cycle the charges were incurred, steer clear! For the record, earning limited-time bonus cash to use in the store is usually not a good enough perk. The last thing you need in January is a push to spend more money while you pay off your debt.

Rewards that you earn are quickly offset by the high interest charges that come with most rewards credit cards. Even with excellent credit, the average APR on a rewards credit card is over 16% APR. At that rate, interest charges quickly offset any rewards you earn. That only takes 1-2 billing cycles.

TIP: Once you’ve selected which cards to use, make sure those cards start with a zero balance. This makes it easier to keep track of how much you’ve spent for the holidays. When the bills come in, pay off the rewards, store, and travel credit cards in full; make the minimum payment on the low APR card. Once the other balances are gone, pay off the low-APR balance in the biggest chunks possible on your budget.

Card type	Best used for	Repayment plan
Low APR credit card	Use for big-ticket purchases that can’t be paid off within a single billing cycle	Minimum payments while you focus on your other card, then pay it off in chunks
Rewards credit card (cash back or points)	Limit use to what you can pay off within 1 billing cycle; start with a zero balance to eliminate interest charges	Start and end the billing cycle with a zero balance to use the card interest-free
Travel rewards credit card	Use for airline reservations and hotel accommodations to earn miles	Pay off quickly to avoid offsetting value of miles earned with interest charges
Store credit cards	Avoid use unless the card offers incentives without time limits	Always pay off store balances quickly, since these cards tend to have the highest APR

How to spend less on holiday gifts

Gifts are often the largest portion of a person’s holiday budget. If you’re hoping to spend less money this season, rethink your approach to giving presents. To do this you can either reduce the number of people on your list or spend less on each gift. Here’s how to do it without seeming like a cheapskate:

• Coordinate spending caps. Depending on your relationship with your gift recipients, set a spending limit that both parties must adhere to. No more feeling obligated to spend more than you can afford or a fear of looking cheap by buying a less expensive present.
• Set up gift swaps and exchanges. Secret Santa or White Elephant exchanges allow you to just buy one present within a group of friends, rather than buying something for each person. Just be sure to implement a spending cap so that no one feels like they got stuck with a bad gift.
• Build gift baskets. Get crafty and make personalized gift baskets. Buying several small items can be cheaper than buying one big gift plus, it shows thoughtfulness and creativity – something money can’t buy. To maximize cost savings, include items that can be purchased in bulk to save even more.
• Gift from the heart (and the hands). Homemade gifts are a great way to show someone you care without a hefty price tag. These can be things like baked goods, visual art, or knitted clothing. If you can make it, you can gift it.
• Gift your time, rather than objects. Actions speak louder than words – and presents. Show someone you care by offering to do something for them, like babysitting or cooking a full-course meal. Make them funny or practical, this type of gift is sure to mean a lot to the recipient as time is the one thing money can’t buy.
• Buy (and ship) your gifts well ahead of time. Shipping costs can really add up, especially if you need anything faster than standard delivery. Buying your presents ahead of time can help you avoid paying expensive rush shipping fees.

Decorate for the holidays (on a budget)

Use these tips to deck the halls without putting a serious dent in your wallet:

• A fake tree is more cost-effective. Not only are artificial Christmas trees way less expensive, but they can be used year after year.
• Replace lights instead of strings. Going through a light string to find the dud can be tedious, but it can be a significant cost saver than buying an entirely new set of lights.
• Set up a decoration swap with friends or family. Inflatables and other yard art are one of the most expensive aspects of holiday decorations. A decoration swap allows everyone to refresh their holiday decor without incurring new expenses. Just be sure to agree in advance on what to do if something gets damaged.
• Get crafty. Making decorations like ornaments at home is fun and a great project if you have kids. You can buy supplies and get a lot of decorative details for your house for the cost of one pricey piece of tchotchke from a store.

Read how to Avoid These Online Shopping Scams

A well-made budget will anticipate all possible expenses and reflect your priorities. However, if you’re still dealing with last year’s holiday debt, budgeting can only do so much. Contact a debt expert today to get your finances in shape in time for the new year.

2022 Holiday spending statistics

Last year the average household planned to spend $886 on gifts alone – a new record ^[1], but a number that doesn’t account for other costs such as holiday travel, food, or decorations. This total is projected to be even higher for 2022.

Even more shocking, however, is how many people put themselves in debt because of the holidays. Last year, 36% of consumers spent more than they could afford, taking on an average of over $1,200 of holiday debt ^[2].

They turned to credit cards, personal loans, and buy-now-pay-later (BNPL) financing to finance their festivities – all of which can come with steep interest rates and fees and is bad news for the 4 out of 5 borrowers that won’t pay off their balances within one month.