Financial management

How to balance holiday spending with year-end saving and investing

6 minute read
December 16, 2021
Financial management
Charitable giving
Family and relationships

You can be prepared for the holiday season with a savings plan in place throughout the year. Budgeting ahead of time allows you to take care of usual expenses and savings goals and set aside funds for the high-spending season. Here are my tips on balancing your competing financial priorities leading up to the holidays and year-end.

Create a yearly budget that includes holiday spending

You don’t have to treat holiday spending as a last-minute expense. Instead, bake holiday expenses into your yearly budget to avoid financial stress at the end of the year. The 50/15/5 rule is a good starting point when you’re budgeting for the year:

  • Allocate no more than 50% of take-home pay to essential expenses. 
  • Save 15% of pre-tax income (including employer contributions) for retirement. 
  • Plan for the unexpected by keeping 5% of take-home pay in short-term savings for surprise expenses. 

From there, look into how to leverage tax-efficient investment strategies to maximize savings. You may want to think about your annual Roth contribution or put money toward a 529. Remember: The 50/15/5 rule is just a starting point. Look at your expenses to see where you fall, and decide if you need to make adjustments depending on your goals and timeline.

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Decide how much to set aside for holiday spending 

After you allocate for your regular bills and expenses, figure out how much of the money that’s available you want to spend on holiday gifts. Then, write down who you’re buying gifts for, and put a cap on how much you’ll spend on each person. 

If you’re exchanging presents with multiple family members, work together to set a limit that everyone is comfortable with. A spending limit helps you stick to your budget and ensures each person receives equitable gifts. For example, you might feel uneasy if your brother spends a few hundred dollars on your gift and you buy him something that’s $20. Setting expectations ahead of time can help everyone avoid awkward gifting situations. 

Your holiday spending may also include charitable donations at the end of the year. It’s important to budget for these and consider how you’ll gift—whether it’s in cash, appreciated stock, or qualified charitable distributions (QCDs).

Additionally, don’t forget to factor in costs besides gifts. Things like decorations, events, special dinners, and travel can really add up. But if you plan ahead, you’ll be ready for all of the expenses of the holiday season.

Shift your perspective when it comes to gifting

When buying for loved ones during the holiday season, try to focus on thoughtful, meaningful gifts. Think outside the box to find activities that don’t require big spending, and check your local community for free holiday events where you can create memorable experiences. If you’re getting together with a group of friends or extended family, activities like a white elephant gift exchange are a fun way to make sure everyone receives a gift—without having to buy something for everyone. 

Also, consider whom you’d like to give a little extra to this year. Maybe your mother-in-law went above and beyond to help you with the kids throughout the year, and you want to stretch for her gift to show your appreciation. If a gesture like that makes sense, decide where you’ll cut back to allocate more for someone special in your gifting budget.

Get ahead in the new year

If this year’s spending has gotten away from you, the new year is a good time to check in, reset, and get ahead. First, prioritize what you want to achieve with your money in the next year. Then, review the 50/15/5 rule to make a plan and begin building up monthly savings for your holiday spending. Remember to consider other major purchases you might want to start saving for as well, such as home remodeling projects or car repairs. 

Also, think about any bonuses or salary increases coming your way, and decide where you want that money to go. I had a client getting a 3% raise the following year, so I recommended she put that extra cash toward her retirement since she was behind on her goal. Go ahead and decide now how to optimize that next dollar.

As you sit down to build a budget, look at your gifting and other holiday expenses from this past year. Can you make any adjustments that will help you stick to your budget? Even a little planning in the new year can help ease financial stress later on.

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