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Tuesday, February 7, 2023
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How to Have a Financially Healthy Holiday

As we enter our first, and hopefully last, COVID-era Holiday Season, the ongoing pandemic might provide many folks reason to make it a big-spending one.

For starters, treating family members (or yourself!) to some above-average spending could demonstrate your thoughtfulness and provide some much-needed retail therapy. Spending more might also seem justified if you’ve cut back on your discretionary spending and commuting expenses in 2020, and will continue to save with less holiday travel.

Others, however, may need to tighten their budgets more than ever this holiday season if they’ve experienced a job loss, reduction in hours or salary, or skipped holiday bonus.

Whatever the current state of your personal finances, there are a number of ways to avoid the holiday spending madness and have a financially-healthy holiday instead—whether that means sticking to a tight budget, resisting the temptation to go overboard, or making the most of your unexpected savings.

Budgeting & Planning As a Family

No matter your family’s financial situation, it’s always valuable to have a conversation and set a family spending limit. While it might seem a bit business-like, it’s also always a good idea to create a spreadsheet where you track your spending so that you avoid overspending on this or that family member and keep your overall budget in check.

Expanding your planning to your gift exchanges with extended family is also advised. This might involve introducing a White Elephant gift exchange, or simply having all adults agree to an acceptable range to spend on the kids. 

“Impulse-buying and not tracking our spending can end up being very damaging, so you really do need to make a conscious choice to live (and spend) within your means,” says Kurtis Swope, Professor and Chair of the Economics Department at the Naval Academy. “Plus, teaching our children to be financially responsible is one of the most important lessons we can give them, and the holidays can provide a great opportunity to instill it.”

Remembering the Sneaky Expenses

Speaking of spending-tracking, it’s also important to remember what Greg Klingler, Director of Wealth Management at the Government Employees’ Benefit Association (GEBA), calls “sneaky expenses.” These are common holiday givens such as food, decorations, holiday cards, wrapping paper, tips and holiday bonuses for your cleaners or mail carrier, and charitable donations.

These types of expenditures are often afterthoughts. But they should be accounted for, tracked, and even be a part of the family budget discussion. 

“If bills are going to get out of hand it is typically around the holidays, when most people rationalize some additional spending, quite understandably, but often overlook or lose track of all the little things,” says Klingler.

Keeping Credit & Debt Priorities in Mind

Most of us become more tempted to make large purchases that we can’t actually afford this time of year. And, if we make them, far more likely to face credit and debt issues in the new year.

Klingler says to be mindful of:

  • Hidden/fine print on company credit cards, including short-lived cash-back incentives, rewards/bonuses that must be used in a small time frame, or interest rates that jump after your first month.
  • Pay-later options on high-cost items, as you’ll not only risk facing a high interest rate and debt when the bills come due, but in the case of something like a new car, additional long-term costs (for example maintenance and insurance) as well.
  • The cons of credit. Even if you manage to resist these temptations, it’s essential to recognize and respect that we spend more when using credit cards instead of cash, according to a now-classic 2001 study out of MIT, and that just a month or two of not paying your full bill can spiral into significant debt and a damaged credit score.

“Debt on credit cards can be devastating to your financial security,” confirms Larissa Costello, of AD ASTRA Wealth Management in Annapolis. “At 18% interest, your debt will double every 4 years. Therefore if you are making purchases on a credit card, be sure that you have the ability to pay off the full balance. Otherwise you should ask yourself, if you are willing to pay twice as much for that item.”

Making the Most of Your Savings

If you are lucky enough to have some extra income, all three experts stress that you should not only still heed the suggestions above, but also use your situation to improve your long-term future. 

Swope, Klingler, and Costello suggest the following high-ROI actions:

  • Pay down any high-interest credit cards. Swope says people rarely recognize how much future compensation they’re giving up by carrying a large balance.
  • Starting or bolstering an emergency fund, to cover at least 3 months of living expenses, for what Costello calls “all those unexpected events that life invariably throws at us.”
  • Purchasing a new or additional life insurance policy at a time when, according to Klingler, the pandemic reminds that none of us is immune to the unexpected.
  • Contributing to your 401k or IRA (especially if your employer has paused your company match or nixed your holiday bonus), a 529 plan, or debt payments.

Pandemic or not, following these tips can deliver the added bonus of helping make the holidays less about spending money on, and more about spending time with, your loved ones.

—Steve Adams

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