How To Handle Holiday Spending? This UVA Expert Shares Tips

08 October 2024

By Zeina Mohammed


As days grow shorter and holidays approach, the expenses of the coming months weigh on the minds of many. Tickets to buy to visit loved ones, gift shopping and hosting expenses loom, even as sales, such as Black Friday, approach.

So, how do you best take advantage of sales without overspending? And why is it so hard to budget accurately?

“People have two general tendencies that can get in the way of accurate financial planning. They are underpredicting future spending and overpredicting future income,” said Ray Charles “Chuck” Howard, associate professor of business administration at the University of Virginia’s Darden School of Business.

In a 2021 study, Howard and co-authors researched the financial phenomenon, which they call “expense prediction bias.” He said the reason we underestimate upcoming spending is a quirk of cognitive psychology.

We base our judgments on the information that most easily comes to mind. So, when it comes to budgeting, we’re thinking about rent and gas but not always factoring in days we get sick or unexpected car repairs.

 

 

Darden School of Business professor Ray Charles Howard studies financial decision-making. (Photo by Emily Faith Morgan, University Communications)

 

 

“It’s why we make these optimistic expectations,” Howard said. “So, when we help people account for that missing information, all of a sudden, their judgments improve markedly.”

To avoid underpredicting future expenses, Howard encourages people to think of a few atypical or unexpected expenses and factor them in. And, to help accurately predict future earnings, he encourages people to base their expectations on average past earnings.

When it comes to the holiday season, he recommends setting a firm budget and trying your best to stick to it. If you are buying presents, for example, identify the people you need to buy gifts for and set a fixed amount per person you want to spend.

Throughout the year, budgeting is a powerful tool that can help reduce expenses. His research has found that even when people don’t stick to their budget, consciously thinking about spending will help them save money.

“If someone typically spends $500 a week and wants to save for a trip, they can set a $300-a-week budget,” he said. “They will likely overspend and, say, spend $400 instead, but that is still less than they would have spent otherwise.”

Whether shopping earlier and taking advantage of sales will save money in the long run depends on wise planning, he said.

But what if you are doing some fall shopping and find a jacket you’ve been looking for that is slightly more than you planned to spend? How can you decide if it’s a financially smart decision?

Howard said the first step is to calculate your expenses for the coming period, whether that’s the next week or month, depending on how you plan spending and saving.

“If you buy the jacket, will you still have enough money to meet all your needs in the coming week or month? This is where underestimating your future expenses can lead to negative consequences,” he said.

If you estimate you have $600 in remaining expenses for the rest of the month, but spend $1,000, underestimating can lead to a credit card balance rolling over into the next month or a reduction in your savings capacity for the month.

Howard noted that sales are designed to increase spending, not help consumers budget their expenses.

“Just because there is a sale doesn’t mean you should go over budget,” Howard said.

This article was originally published in UVA Today.

About the University of Virginia Darden School of Business

The University of Virginia Darden School of Business prepares responsible global leaders through unparalleled transformational learning experiences. Darden’s graduate degree programs (MBA, MSBA and Ph.D.) and Executive Education & Lifelong Learning programs offered by the Darden School Foundation set the stage for a lifetime of career advancement and impact. Darden’s top-ranked faculty, renowned for teaching excellence, inspires and shapes modern business leadership worldwide through research, thought leadership and business publishing. Darden has Grounds in Charlottesville, Virginia, and the Washington, D.C., area and a global community that includes 18,000 alumni in 90 countries. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.

 

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