Traditionally, one gives presents at this time of year, and Della and Jim want to buy something very special for each other. As they have little money, they both sacrifice their most valued possessions that ironically cannot be used. O. Henry calls these two "wise" rather than foolish for doing this, and uses the setting characters and events to develop his theme. The narrator calls attention almost immediately to the two most important details of the story's setting: it takes place on Christmas Eve, and its two main characters live in an unassuming flat. O. Henry sketches the flat with just enough detail to convey an image of its squalor: it's cheap, sparsely furnished, and has a broken mailbox and a broken doorbell. .
The couple, however, does not think of life this way. Della, is depicted a poor woman with few good garments, hardly getting by. Although, O. Henry makes you feel that Della is excited at each new thing, and yearns to see Jim come in the door. "She stood by the window and looked out dully at a gray cat walking a gray fence in a gray backyard." The characters could have a dreary attitude but O. Henry does not mention this.They picture their flat as a fine home oppressed with hard times. The couple has adapted to their flat. "A very thin and very agile person may, by observing his reflection in a rapid sequence of longitudinal strips, obtain a fairly accurate conception of his looks. Della, being slender, had mastered the art." This is a great example of how Della has adapted to the flat. She uses the small strip of mirror to its fullest potential. The action of the story depends on the fact that Christmas is sufficiently close that Della needs to buy a present now, even with her small amount of money. The couple's very humble abode brings out their poverty vividly. It's their poverty which both forces them to make the sacrifices they do, and which makes those sacrifices meaningful.