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Why You Need a Holiday Budget This Year More Than Ever

A woman's hands wrapping a gift with a ribbon on a wooden table next to a teapot, scissors, and wrapping paper.

Image source: Getty Images

The holidays may be a much-anticipated time of the year, but they can also be expensive. In fact, many people close out the holiday season in debt. And the last thing you want during "the most wonderful time of the year" is more debt.

If you set a budget for the holidays, you may be less likely to go overboard. This year, it's more important than ever to be thoughtful in your spending. Here's why.

This is not the year to rack up debt

Millions of Americans have lost their jobs or seen their income decline through the coronavirus pandemic and subsequent recession. It's never a good time to rack up a credit card balance -- but it's especially hazardous when your job isn't secure. The last thing you need is a new monthly payment hanging over your head.

If you rack up a lot of debt during the holidays, it could negatively impact your ability to borrow money later. That's because debt drags down your credit score. In a time when your job is at risk -- and you may need a personal loan in the near future -- it's important to keep your credit score healthy. Step one is to set up a holiday budget and stick to it.

How to establish your holiday budget

Your holiday spending budget may look different this year. If you normally travel to see family, you might find yourself skipping the flight to stay safe in light of the pandemic. As a result, you may have more wiggle room to spend in other categories. Figure out if you'll be buying gifts only, or buying gifts in conjunction with other expenses -- like hosting a small gathering or springing for decorations and cards.

Next, figure out how much money you can afford to spend. Don't raid your emergency fund for holiday spending. Money socked away on top of your emergency savings is fair game, though. If you have $3,000 in savings, you may feel comfortable taking out $500 for the holidays.

If turning to your savings account isn't an option, take some time to figure out how much spending money your upcoming paychecks will allow.

Finally, set priorities. If you know what expenses you're looking at and how much money you have, you can order your expenses by importance. For example, let's imagine you set a spending budget of $800. We'll say that needs to include a dozen gifts, modest decorations, and cards. However, you really want to get your parents something nice. You may decide to allocate $150 to their gift alone, then divide up the remaining funds among other gifts.

Start the new year off without debt

We don't know what the state of the economy will look like at the end of 2020, but it's fair to assume that it won't be back to normal. We also don't know what 2021 has in store in terms of the economy. Your best bet is to kick off the new year debt-free (or, at the very least, without additional debt). Tempting as it always is to splurge on the holidays, this just isn't the right time to go overboard. If you stick to a budget, you'll minimize financial stress -- and make it easier to enjoy the priceless moments of the holiday season.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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