ASU faculty member gives financial planning tips for holiday inflation

As the holiday season approaches, the fear of inflation has some shoppers concerned about the cost of holiday shopping. 

A recent survey found that half of consumers are heading to stores early this year to get a head start on their holiday shopping, with nearly 20% starting their shopping as early as October. 

RELATED: Holiday shopping deals in October?

Here, Debra Radway, senior lecturer at the W. P. Carey School of Business who teaches financial planning courses at Arizona State University and ASU Online, talks about how inflation will play a role in consumer spending, and how families can prepare for this holiday season and beyond.

Question: How will inflation impact middle- to low-income families this holiday season? 

Answer: The cost of goods and services that impact most middle and low-income families are up significantly this year. According to the Bureau of Labor Statistics, from August 2021 to August 2022, rent is up 6.7%, household energy costs are up 13%, food at home is up 13.4% and gasoline is up 24.6%. Although the increases are moderating recently and some costs like gasoline are falling, salary increases have not kept up with these rising costs. This will leave families with less money to spend on gifts and holiday entertaining.

Q: Is it too late or are there things people can do now to lessen the financial impact? 

A: Making a list of who you want to buy holiday gifts for and setting a budget for your total and per-person gift expenditures will help minimize overspending. For example, once you know you are budgeting $50 on a gift for your mom, you can start looking for items that would be a thoughtful gift and take advantage of pre-holiday sales. Many retailers are anticipated to have extra inventory this year, so you may be able to find deals earlier in the holiday season.

A way to save a substantial amount of time and money on holiday gifts while maintaining the joy of giving is by doing a family gift exchange. We have been doing this for years in my family. Instead of buying a gift for every sibling and parent, we draw names anonymously through drawnames.com. Each family member gets the name of another family member and their wish list. We then proceed to buy one special gift, based on the agreed-upon budget, for the chosen family member.  We all get together and exchange the secret Santa gifts. If you have a family of 10 people and have a $35 gift budget, you will buy one gift for $35 instead of 10 gifts for $350.

Q: Looking beyond the holiday season, what can people do to plan their finances better in the coming year?

A:  Here are my suggestions for healthy finances.

1. Financial health checkup.

A financial health checkup will tell you if you are spending more than you make. Have your credit card balances increased since a year ago? Has your total savings and checking increased or decreased since a year ago? Have you withdrawn money from investment accounts over the last year? If you are spending more than you make, you will see one or all of the following: credit card balances increasing, investment withdrawals or savings decreasing.  

2. Pay off credit card debt.  

If you aren’t able to pay off credit card debt on a regular basis, you probably shouldn’t have them. About half of Americans pay off their credit cards each month, and the other half pay costly interest rates of 18% to 22% or higher. Cut the cards up and start paying down the debt by eliminating high-interest cards first or low balances first. Once they are paid off, close the account, and if you need a card, keep only one card at home and not in your wallet going forward. 

3. Check your credit report and credit score.

You can check your credit report for free using a trusted site, such as AnnualCreditReport.com, to make sure that all credit transactions are being properly reported. Your credit history will determine how much you pay for future loans, so improving your credit can save you money.

4. Pay cash for purchases.

Individuals spend less when they have to depend on cash for a transaction. So after you cover your monthly bills for housing and cars, take the leftover money and split it into categories such as groceries, eating out and entertainment, clothing, etc., and pay with cash. When the cash is gone in that category, you need to wait until the next month or pick up more work. One thing we learned during the pandemic is that we spend a lot of money each month on things we can do without. 

5. Take advantage of a company match in your 401(k) or 403(b). 

Many employers will encourage you to save for retirement by matching what you put into your retirement accounts. This is free money that you should take advantage of. If you make $40,000 and your employer matches your first 6% of contributions, you can contribute $2,400 to your 401(k) and your employer will put an additional $2,400 into your account. It is worth it to get spending under control and take advantage of this “free money.”

Q: Anything else you'd like to add that people should be thinking about when it comes to their finances?

A: Take a look at your automobile costs. Many families spend a significant amount on their cars. Some families are spending close to their housing costs on the vehicles they drive. So extending the life of a car or purchasing a used car instead of a new car can substantially cut the costs of the car payment, auto insurance and licensing.