Budgeting for the Holidays

Most individuals spend more money between Thanksgiving and the end of the year than they would other months of the year. A number of different religions celebrate holidays in December, and even those who are not religious generally find themselves attending many celebratory gatherings in the lead up to the new year.

More social obligations usually means more spending. If you exchange gifts, host parties, donate large sums, or travel, that is even more money. A number of areas of life require a uniquely high amount of spending in December. This can be difficult to plan for if you think of your budget as a consistent amount each month. Instead, acknowledging that holiday spending will likely increase above a typical month’s spending is a better way to get through the holidays without financial stress decreasing your holiday cheer.

What Not to Do

You are increasing your spending beyond its normal levels, but the holidays are not an unpredictable emergency. Do not charge up a credit card to pay for this greater spending without a plan to pay it off by the time the bill is due. Spending a little too much to pay off each year is how folks end up with overwhelming credit card debt over time. Making sure you do not go into debt to begin with is much easier than digging out of it.

If you are considering putting holiday expenses on a credit card without a plan to pay it off immediately, you probably did not plan for the holidays in advance. This is a mistake. The farther ahead you plan, the easier covering holiday expenses will be. Ideally, you can save for these expenses all year and draw from accounts as needed when the holiday season arrives.

Plan Ahead: HYSAs

The best way to cover seasonal expenses is to open a high-yield savings account and label it for a specific purpose. Have a gift fund, travel fund, party fund, and whatever else is applicable to your holiday traditions. You can organize these in any way that feels right for you. Maybe gifts and donations are grouped into one category, or maybe they are separated to distinguish what money is allocated for tax-deductible donations as opposed to buying a gift for your sister. If you host a party, you may pull from your normal grocery budget, knowing December will be more expensive than the average month, or you may have a specific account for hosting parties.

However you organize your high-yield savings account buckets, having these buckets gives you some magical opportunities. First, they make it easy to save for holiday spending all year long. If you have never done this before, use this holiday season as a trial period. Track and categorize your expenses this holiday season. This will give you an idea what you spend on various categories. Starting in January, you can split the cost of your holiday spending across all twelve months and set up an automatic recurring transfer to send money into the appropriate high-yield savings accounts to fund next year’s holiday season. By doing this, you will have a large bucket of money to use when next December arrives.

Using high-yield savings accounts as the location for these buckets adds an additional magical quality: interest! High-yield savings accounts gain interest, so if you save all year, your money will earn money and give you a small boost to spend on each category. This will account for inflation and make you feel like you got free money for contributing to your holiday party fund back in January.

Bonus: Get a New Credit Card

Once you know how much you spend around the holidays and have a system of buckets to cover your increased holiday spending, it may be worth considering whether your spending makes the holiday season an ideal time to open a new credit card. Many rewards cards have high minimum spend requirements to receive a large amount of points as a sign-up bonus. On the average month, it can be difficult to spend enough money to meet these requirements. However, around the holidays when we spend more money, it is easier to meet these minimum spending requirements and receive large sums of points or miles.

Before opening a new credit card, make sure it is actually worth it for you. If you would have to invent some extra spending, it probably is not a good choice. That said, if your holiday spending combined with your summer vacation would easily meet the minimum spending requirement, book that summer vacation in December. You will get better rates for booking early while getting points for your next trip.

Additionally, only open up a rewards credit card if you have the money to pay it off in full! The money to pay off the rewards card should be sitting in your high-yield savings account buckets waiting to be spent on holiday spending. As long as it is, give yourself an extra gift over the holiday season with some rewards points.