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Shopping vs. Saving: Here Are The Rules

It's that time of year when you're tempted to spend money instead of save it. While the Holidays can be fun, they can also be one of the most stressful and damaging times for your finances.

You can't afford to let the holidays derail your retirement savings goals. So here are a couple of holiday shopping rules to help you stay on track for retirement:

Savings. If you haven't already saved at least 12% of your pay this year, then you shouldn't spend any money on holiday gifts. Yes, that sounds harsh, but you can't afford to be complacent about these issues anymore. There's no "retirement Santa" and you'll live the retirement that you saved for. If you don't save much money, then you're not going to have much of a retirement.

  • At a minimum, you need to save 12% of pay each and every year. You can see how hard it is to grow your wealth, especially in times of lousy financial markets. So savings is your number one tool.
  • Add up what you put into your 401(k), IRAs, and any other savings and investment accounts. If that doesn't equal 12%, then you know what you need to do.
Credit Cards. If you haven't paid off all your credit card debt, you shouldn't be buying gifts that will just put you deeper into debt. If you carry a credit card balance, your discretionary money should go toward paying down that debt.

All Other Bills. If you aren't current on all your other bills (utility, phone, insurance, cars, student loans, mortgage, etc), then you shouldn't be spending any money on gifts. Again, you know it just doesn't make any sense to fall further behind on your bills so you can buy a few more presents.

Ready To Shop. Alright, if you've already saved 12% of pay, have no credit card debt, and are current on all your other bills, you're in a position to spend a few bucks on some presents.

Now you might think that under those standards there aren't too many people who should be out spending money this holiday season. Well, you're right. Before you jump to the conclusion that I am a holiday scrooge, did you really think that good financial advice would include a suggestion that you spend more money on things you can't afford. The rules are pretty simple and common sense. It's just hard to follow them, which is why so many people discover that the holidays don't pack much financial cheer.

I realize that sometimes we can't live our financial lives in line with simple advice. Sometimes you just have to buy a gift. But the point is to make sure that you think critically about what you're spending this year. These decisions have long term consequences, and you don't want to let the pressure to spend during the holidays damage your family finances.

If you find you're not in a position to spend much this holiday season, the toughest part is figuring out how to tell your family. I suggest telling them the truth: that you want to make sure you reach your savings goals, are current on all your bills and don't spend more money than you actually earn. If they love you, they'll understand and be happy for you. If they're upset, then you probably would have been wasting money on a present for them anyway.

Bottom line. Go ahead and shop if you've got your financial house in order. If not, you know what you need to do.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.