Can you really afford to buy that gift?

Why You Should Budget For Gifts

• Preparing a budget that incorporates all of the things you plan to spend money on throughout the year provides an opportunity to decide what you can afford and what you cannot before you spend the money, so that you know you will have enough funds to cover everything. Without a budget, people tend to make spending decisions based on the cash available in their account or the credit limit available on their credit cards. This can leave them strapped for cash or without available credit when another bill becomes due down the road. This is one of the reasons that insolvency filings tend to increase in January each year – people have spent more than they can afford over the holidays, leaving them unable to deal with bills and service debts in the new year.

• Shopping for gifts for a loved one can be a very emotional process, particularly for those for whom gift-giving is their way of showing love. However, making financial decisions while in a state of high emotion tends to end in poor results. Setting a budget (or a limit) for gift spending can help guide you so that you can avoid becoming attached to a particular gift idea that is more expensive than you can afford. It can also be a measuring stick for when to stop shopping for gifts, particularly around the holidays.

• When preparing a budget for the first time, or even adjusting your budget after something major has changed in your life, it’s often an eye-opener. Many people don’t realize until they prepare a fulsome budget just how little they can realistically afford within their income level. Or they are astounded at how much their usual spending adds up. Often, the first draft of the budget doesn’t look very good: you may find your plan has you spending more than you make, or leaves little room for saving. Once this reality check sets in, many people realize that they have to reduce their spending plans in some areas. Quite often, spending on gifts is an area that gets adjusted.

How To Decide What To Budget For Gifts

When preparing a budget, it's unusual to be able to fit everything you could possibly want in it. The process usually involves considering (or reconsidering) your priorities in order to decide what makes the cut and what doesn’t.

Depending on the size and closeness of your family, and your family traditions, gift-giving may be a higher or lower priority for you compared to others. This makes it a highly personal decision.

However, there are a few guidelines to consider:

• The first priority should always be your “needs”. Needs are things you can’t live without, like shelter and food. No matter how important gift-giving feels to you, it probably isn’t a “need”. Make sure you can cover all of your needs before you even consider adding gifts to your budget.

• For every dollar you budget for gifts, there will be a trade-off. Perhaps you’ll have to spend less on fun things like restaurants or entertainment. Or it will take you longer to save toward your financial goals. Maybe you’ll even have to cut back on some of your basics, like groceries or your cable bill. Thinking about what you’ll have to give up to spend money on gifts will help clarify your priorities.

• There may be other, less expensive, ways to show your love. Homemade gifts or spending more time with someone may be an excellent substitute (or partial substitute) for a store-bought item. In the vast majority of cases, if your loved ones knew you were taking on debt or foregoing spending on needs or other priorities in order to give them a gift (or maintain your prior level of spending on gifts), they would gladly accept an alternative.

As a Licensed Insolvency Trustee, I speak with people every day about their finances. When I’m helping people create a budget, they often struggle with how to treat gifts. Most people consider gifts a high priority, but they often end up realizing that they need to limit their spending in this area. Without a budget, you may overspend and put your financial situation at risk. Therefore, it is important that gifts be included in your budget.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals navigate their options to deal with overwhelming debt. If you would like a free, no-commitment consultation to review your options, contact us.