We all know that long-term savings is critical to financial success, but first we have to get our short-term (within the year) savings right. We have to develop a habit of setting aside some of our paycheck for upcoming annual expenses, like the holidays. When you don’t, it can actually affect your long-term retirement planning goals.
According to a survey conducted by Magnify Money, the average American racks up about $1,000 in debt over Christmas.
In the retail world, this is the Super Bowl. Marketers come with a plan, and consumers come ill-prepared. For example, one appliance store pumped in the smell of apple pie, and the sale of ovens and fridges went up 23 percent. As another example, some companies will give you free chocolate because it increases your desire for non-food luxury items right after you enjoy the treat. Retailers are marketing pros; you need to be prepared for the game.
During the holidays, we see the most careless collision of emotion and money – and the places you go shopping are ready for it! The truth is that emotions and money just don’t mix. And spending outside your means can have bigger effects that you might think. Going into debt for the holidays can affect your future retirement plans.
Here are 3 steps to help you “save to spend” for the holidays:
1. Calculate Your Current Spending
Set some time aside (probably around 20 minutes) and add up what you plan to spend for the holidays. Be honest! Add up the price of gifts, dining out, holiday parties, events you will host, decorations and anything else you can think of.
For the purpose of this post, let’s assume the number comes up to $1,000.
2. Add Room for Fluff
The truth is, you typically spend more than you plan to. So it is wise to budget a little bit higher than you originally thought. We recommend adding 25 percent to your total.
Again, for the purpose of this article, this would be $1,000 X 1.25 percent, which equals $1,250.
3. Divide and Save
Now you need to divide your budget total by 12. This is the monthly amount you will need to set aside to prepare for next year’s holiday season.
For our example above, this amount is a little more than $100 per month. That’s it! What sounds easier: Saving about $100 a month or $1,250 in one month?
I have used this save-to-spend strategy for years, and it works! You can put the monthly allotment in a savings account with the bank or you can place it in an envelope hidden in your home.
It might seem crazy to start planning for the holidays in January, but believe me: Opening gifts is a little more peaceful if you save to holiday spend. Otherwise, you can fret and worry. And that’s not the holiday spirit.
Once you start saving to spend, try to make it a habit for other things. For example, you can use this strategy when planning to buy a car, go on vacation and make other future purchases. Being prepared begins with good, mature money habits.
You can also use this strategy for your giving plan.
According to Giving USA’s Annual Report on Philanthropy, Americans give around 2 percent of their income to charity or other nonprofit organizations. Outside of the real, painful, global needs, there are interpersonal reasons why it’s critical to consistently commit to giving.
Givers are Happier
According to the Science of Generosity Initiative at Notre Dame, those who gave more than 10 percent of their income say they rarely or never experience depression compared to those who don’t.
Many Americans suffer from depression, and much of the depression and/or anxiety is triggered by money problems. The irony is that you may be able to solve your money problems by giving away more money. I would suggest that a money/depression correlation is so tight that one might conclude that giving away more money could actually reduce depression. I don’t think it’s a stretch to suggest that by giving money, potentially reducing depression, you will think more clearly. When you think more clearly, you make better money decisions, thereby turning around your financial life.
Givers Have Perspective
When you give to a charity on a regular basis, you usually receive newsletters and emails that keep you abreast of what’s going on. There are usually powerful and inspirational stories in these newsletters that can help deliver perspective. These stories can minimize your first-world, trivial money concerns.
For example, it is possible that right now, your current perspective is tainted. Your only point of reference is the neighbor with a pool or your college buddy’s promotion. This point of reference is a Western fallacy that traps us in consumerism and worry.
How will all of this affect your overall retirement planning?
Making this save-to-spend strategy a habit can get you better prepared for the future and steer you away from going into debt because of a lack of budgeting.
Think about your retirement plan. Start saving a minimum of 10 percent. And increase your retirement savings by 1 percent every year at open enrollment. In five years, you’ll be at 15 percent and you won’t even feel it. Some 401k experts have been so impressed by the science behind automatic contribution escalations that they have installed features that will do it for you. Check with your plan administrator.
I know you may have to sacrifice a few lattes and after-hours drinks, but what you can do with these savings can be worth it. Don’t listen to the foolish and broke who preach, “Well, you only live once.” There’s a good chance that skipping on lattes now so you can enjoy the future will make you feel better in the long run. And as they say, “you only live once!”
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.