Financial Planning
December 20, 2022

Holiday Shopping Amidst Inflation

Record inflation and interest rates, combined with the threat of a possible recession, are making holiday shopping especially tough this year.
Stewart Willis
Co-Founder & Co-Owner Asset Preservation Tax & Retirement

Holiday shopping is expensive, especially if you have a large group of family and friends to buy presents for. If you’re not careful, you could easily rack up thousands of dollars worth of Christmas gifts on your credit card.

This year, it’s especially tough. Inflation is high, and so are interest rates. That high interest could mean you spend much more on a gift than the amount on the price tag if you don’t pay off your credit card balance every month. Especially in an inflationary economy, it’s important to control your spending and not go into debt if at all possible.

Set a Budget

If you’re a procrastinator who still has presents to buy this year, set a holiday gift budget. Decide how much you can comfortably spend without going into debtor draining your savings. Then decide who you want to buy presents for and determine how much you can spend on each person.

Use Cash

It’s a good idea to buy presents in cash when possible; not using credit cards makes it impossible to rack up high credit card balances! Adding to the difficulty this year are the dire economic predictions we see on the news, forecasting a recession and job losses.

Be Prepared, Always

Shopping for non-necessities like holiday gifts can be a frightening prospect if you’re not sure you’ll be employed a few months from now. Something we try to emphasize with our clients at Asset Preservation Wealth & Tax is that you don’t want to only prepare for tough economic times when pundits say they’re imminent.

Rather, you should always be prepared for recessions because recessions are inevitable components of an economy. If you’re always preparing for a recession, then you’ll always be ready no matter when one happens. That doesn’t mean you should never shop for holiday presents; it just means you shouldn’t blow through savings meant for emergencies or drive yourself into debt to do so.

Considering all that, you might be asking why so many Americans are spending as though a recession will never happen! Americans carried about $925 billion in credit card debt in the third quarter of 2022. That’s an increase of $38 billion over the first quarter of 2022!

Sky-High Debt

We’ve driven our credit card debt so high because people spend as if the current situation will always continue. Times are, compared to a couple years ago, relatively good. We aren’t trapped at home in a pandemic amid mass layoffs and a sour economy. Instead, unemployment is low, money is flowing and many are more flush with cash because, having little to spend it on during the height of the pandemic, they paid down debt instead.

But as we saw earlier, pretending this situation will always be true — and spending money as though it will — is a recipe for disaster. We’ve been here before. In 2008, people were making a lot of money, until they weren’t. After the housing market collapse, it was a perfect time to invest in real estate, but many couldn’t because they had not been hardening their finances against a downturn. When it struck, they were caught out in the storm and had no ability to take advantage of the low investment prices. 

This all may seem somewhat far away from the idea of budgeting for holiday spending, but part of budgeting should be to look at how your holiday spending plan relates to your finances as a whole. If you end up with an enormous credit card bill after a generous bout of holiday shopping, you won’t have access to capital in the way you would if you were debt free.

Then, there’s another consideration: What happens if you suddenly lose your job? It’s important to remember that the goal of raising interest rates is to reduce the workforce. By causing enough people to lose, or just become nervous about losing their jobs, spending will slow down, which will drive prices down.

Keep Your Options Open

If you’re one of the people who does lose a job in the coming months, think about how much harder it will be to access the capital you need for living expenses if you spent too much of it in December. It’s important to always have cash reserves to get through an economic storm. Buy presents, but don’t overextend yourself while doing so.  

All of that said, remember that it’s possible to go too far in the other direction. It’s neither desirable nor healthy to become a miser out of fear of an economic downturn. I regularly tell people, don’t act frightened; just be prepared.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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