Tips for Cost-Conscious Holiday Spending

N E W   Y O R K, Dec. 14, 2001 -- As the old saying goes, it is better to give than to get, but if you are going to do the giving this holiday season, save yourself potential headaches and spend wisely. You may even get something in return.

According to a recent ABCNEWS.com survey, the average American plans on spending approximately $775 on holiday gifts this season, down slightly from an inflation-adjusted $826 last year, and down further still from 1999, when shoppers came home with $930 worth of holiday loot.

Being sensible, organizing your thoughts, and streamlining your shopping process are the best ways to keep from spending frivolously and doing damage to your bank account, or your credit card balances.

Good Debt vs. Bad Debt

While it's never a good idea to go into debt to finance holiday gifts, if you have to, make sure to understand the different types of debt to ensure controlled spending.

For starters, be aware that credit cards, especially those from department stores and specialty retailers, can have annual percentage rates (APRs) as high as 24 percent.

Major credit cards may have lower rates, but these, too, are still significant. The interest rates can go up if you send in your payments later, or if you are not able to pay the minimum amount.

Home equity loans, which have rates that are lower than credit cards, can be a better way to finance purchases if you stay disciplined and are confident you can pay the principle and interest off in the given amount of time.

Here are some ways to save money while you shop:

1. Know your budget: Tell yourself that once you set this number it is non-negotiable. Remind yourself that $10 allocated for a person's gift means $10, not $12, unless you are willing to offset the added expense with a lower-priced item for someone else. After every purchase, track the exact amount that you spent and keep a running log.

2. Make a list: Keep a detailed list of who you want to buy things for, how much you want to spend, and what you would like to give. Be as specific as you can — it will keep you focused.

3. Shop before you shop: Before heading out to the stores, do as much research as you can. Phone around to find the best price on the item you are looking for and go online to see if you can find a better deal. Also, if possible, consolidate your purchases to a few stores to cut down on transportation costs.

4. Choose debit over credit: Resist using your credit cards and try using your debit cards instead. By using a debit card, you automatically force yourself to spend only what you have and you avoid paying credit card interest. When the money in your debit account is gone, your ability to shop goes with it.

Leave your credit cards at home and only take your debit card with you — that way you will not be tempted to use it if you run out of money or fall in love with a gift not on your list. Let's say that you go ahead and charge the $775 (the amount the average American is planning on spending this holiday) and pay the minimum payment of $10 a month with an average annual percentage rate of 14 percent. It would take 38 months for you to pay it off. That is an additional $178.50 of interest that you pay over that time period!

5. Consider department store credit: Get a department store credit card. You can save 10 percent, even 15 percent, on a day's purchases if you plan to pay it off immediately. However, if you do not pay off the entire bill, you may face APRs upward of 20 percent.

(Mellody's math: If you pay $100 for a blouse and take the 10 percent store credit discount, you would pay $90. However, if you were unable to pay the balance by the due date, you would pay $18.90 in interest (assuming a 21 percent APR), which would completely wipe out your $10 savings. You are now paying $108.90 for the blouse that was originally priced at $100. If you continue to carry a balance, you pay 21 percent until you are able to pay it off completely.)

6. Seek zero-percent financing: If you are considering a big-ticket item like a family computer, seek out stores that are offering zero-percent financing on purchases. Right now this is a popular sales strategy (the auto industry is also using it). Some stores are extending zero-percent financing until January 2003, giving you a full year with no finance charges. This can be as good as paying cash, if not better, as long as you commit to a disciplined payment schedule before the interest rate starts to be levied a year later.

7. Going out of business sales: Look for stores that are trying to liquidate their inventory either because they are going out of business or moving. In these situations, bargains maybe plentiful, but returns may also be problematic, so make sure you know exactly what you are getting.

8. Merry New Year: Wish your friends and family a "Merry New Year." Celebrate Christmas on Dec. 25, but exchange gifts on Dec. 30 or Dec. 31. After-Christmas sales are likely to offer discounted prices on the same items that people purchased before Christmas Day.

9. Give gift certificates: This year is sure to bring phenomenal post-holiday sales because of the already reduced prices at most major retailers. The certificate you paid $10 for is suddenly worth $12 because it goes a lot further after the holiday rush. With the United States experiencing its first recession in a decade, retailers are pulling out all the stops to get people in their stores by offering considerable markdowns. A recent survey by America's Research Group showed that 41.3 percent of shoppers (up from 25.4 percent last year) are planning on giving gift certificates this year in anticipation of grand post-Christmas sales. Jump on this bandwagon.

10. Free wrapping? Save money by having stores wrap your gifts if it is a complimentary service. If not, use the financial pages of the newspaper to wrap gifts for business associates, and the comics for children's gifts. Finish the gift off with a nice bow. You will avoid spending $10 or $15 on fancy wrapping paper and be able to use the extra money toward additional gifts.

11. Interest-raising gifts: Give a gift to raise the recipient's interest. Instead of gifts, buy stock directly from companies for co-workers and various family members. When purchasing stock directly from a company you avoid the potential fees and hassles of going through a broker or online service. This present can start a wonderful tradition and instill the habit of saving.

There is not a better stocking stuffer than a stock certificate from a company that your child is familiar with — it is educational and financially rewarding. For example, you can buy stock directly from Mattel Inc. for your nephew instead of the hot toy that he is sure to forget. Likewise, buy your father-in-law a share of stock directly from Home Depot instead of a new power drill. Gifts of stock are a low-price present that makes a big impact. I like to think of it as a present for the future.

Mellody Hobson, president of Ariel Capital Management in Chicago, is Good Morning America's personal finance expert. Click here to visit her Web site, ArielMutualFunds.com. Ariel associates Matthew Yale and Anne Roche contributedto this report.