When I do budgets with my clients, I’m frequently shocked at the annual outlay for gifts. After housing and food, gifting is one of the larger annual expenses for individuals in terms of percentage of income dedicated to it. For one of my clients who earns around $100,000 per year gifts accounted for roughly $3,500 (3.5%) of her gross income. For another client who only earns around $60,000 gifts accounted for almost $2,400 (4%) of her annual income. And that’s after taxes! The percentage of income dedicated to gifts was noticeably higher for people in their late 20’s and early 30’s when wedding season tends to hit hardest. So the question begs itself: does gift giving come back to reward you, or bite you?
I’ve got to say bite you—and often bite you hard. I say this not just because giving gifts requires spending money, but also because the amount of utility recognized for items purchased as gifts is often much lower than items purchased by a person for him/herself. Clearly I’m disregarding the whole sentiment angle—the bubbly, warm feeling people get when purchasing a gift for someone else. There’s also that lovely moment of shock for the recipient when they learn that someone else spent time and money on them without their knowledge.
Joel Waldfogel, author of the book Scrooged: Why You Shouldn’t Buy Presents for the Holidays, makes the interesting point that retail campaigns designed to encourage holiday spending lead to many inconsistencies in terms of matching products with users. People feel pressured into holiday spending an often blow money in the holiday spirit, not because they’ve successfully matched an appropriate gift for an appreciative recipient. Waldfogel goes on to analyze the amount of money spent on gifts and compare the utility of those gifts vs. things he may purchase for himself. On average, gifts get 20-30% less utility than items purchased by oneself. Why? Well, it’s fairly obvious. People giving gifts don’t know exactly what you want and they don’t know exactly what you have. They also can’t navigate around the particulars of a gift such as exact colors and sizes the way you could. Therefore, they make a worse purchase than you would have with the same number of dollars.
So what can we conclude from all of this? Not a whole lot. Gift giving is an important part of our culture and is likely to stay that way. What we can do is carefully consider the recipient and attempt to find something which they will appreciate that isn’t overly expensive. People who don’t earn a huge amount of money should focus more on the thoughtful aspect of gifting and try to spend only 1-2% of their after-tax income on gifts. The most important thing is to be honest with oneself and others about what is reasonable to spend and what you can afford to spend. Take someone out to dinner if you can’t afford to buy them a $100 gift. Buying a few good books or DVDs is often a less expensive way to provide someone else with many hours of enjoyment.
Happy holidays to my readers! See you in the New Year.
Premier Financial Advisors, Inc.
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Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.