Disaster-proof your holiday spending.

  1. Identify your savings goal for the year – then adopt habits to make it happen. If you aren’t already doing this, start saving 10% of your income every year. It will give you the confidence of knowing you are living within your means, and ensure that you will be able to make ongoing investments in your financial health, year after year.
  • Figure out exactly what 10% means for you. If you make $47,000 a year, 10% of your income is $4,700. That’s your savings goal for the year.
  • Max out your contributions to all the retirement plans available to you. This includes employer-sponsored plans like a 401(k) or individual retirement accounts (IRAs) that you set up yourself. Many people may hit their annual savings goals simply by maxing out their retirement plan contributions.
  • If maxing out your retirement plan contributions does not get you all the way to your annual savings goal, sock away the remainder in a savings account or (eventually) a taxable investment account.
  • Put your savings on autopilot. 401(k) contributions are easy; they come straight out of your paycheck. For the rest, set up automatic transfers for the beginning of the month. By doing this, the money you have earmarked to save is transferred from a checking account to a savings account before you have a chance to spend it on something else.
  1. Disaster-proof your holiday spending.
  • Before the shopping madness begins, calculate how much you can really afford to spend, TOTAL. How do you know what the magic number is for you? Here’s a rule of thumb. Most people should allocate no more than 1.5% of their income for holiday expenses. So if you make $50,000 a year, this means your holiday budget is $750. Keep in mind that this figure covers everything, not just gifts. Big-ticket items such as travel expenses should fit within this budget and smaller expenses like holiday decorating or special dinners out should be factored in as well.
  • Break it down. Knowing your total budget is one thing, but you also need to set spending maximums for specific items on your list. Work backward from your overall budget and plan how much you are spending on each person. Prioritize; if you know airfare is a necessary expense, you may need to reduce your spending on individual gifts. Share your thinking with your family beforehand so that you have support for the decisions and choices you’ll be making.
  • Start as early as possible so you can swap time for money in your holiday gifting. We all know those thoughtful, homemade gifts and efforts are very special, but they take time – both time to plan and time to implement each project. Think back to your own favorite holiday gifts for inspiration.
  • Go into the holidays with an updated calculation for your emergency fund. Remember, this is your cushion for unexpected expenses and should be six months’ worth of expenses held in a readily-accessible account. Many of us will hit this fund for holiday spending, which is fine as long as we build it right back up again after the holidays. Tap your emergency fund for holiday spending only to the extent that you know you will be able to replenish it right away.
  1. Save your bonus, overtime pay, or promotion pay. It is tempting to treat your year-end bonus or other unusual income as play money. Don’t do it! Instead, commit to a new habit: sock away these lump sum amounts immediately, then leave them alone. Do the same with other unexpected financial windfalls – tax refunds, inheritances, or gifts. Before you know it, you may discover that you are most of the way to where you need to be for retirement.
  2. Every six months or so, “reset” your spending habits by taking a no-spend month. This is a great way to jump-start a savings campaign and it can make a big difference in your personal balance sheet. It’s simple: commit to a 30-day period of spending ONLY on necessities. Walk or bike to everywhere instead of driving; take lunch to work every day; embrace free entertainment options, like exploring local parks. Not only will you save a lot of money during this one month period, you may find yourself re-evaluating old spending habits altogether and deciding you prefer your own creative, low-cost alternatives.
  3. Once a year, do an insurance check-up. Financial security is about more than growing the balance in your bank or retirement account. It also means protecting the assets you already have from potentially catastrophic losses. Once a year, do an insurance checkup to make sure your assets and future are adequately protected from liability. Review your home, health, and auto insurance policies to make sure you have enough coverage to protect your savings and your family in case of a medical, legal, or other emergencies. Other types of coverage to consider: identity theft coverage (which reimburses you for the costs of repairing your credit history if you become a victim), and umbrella liability coverage (which protects your assets beyond what your homeowners and auto policies already cover).
  4. Married or in a relationship? Schedule monthly “Financial Date Nights” to discuss household finances with your partner. You don’t have to have a specific question or project to tackle at these meetings. Instead, before financial issues arise, share your history with money, discuss and reconcile your spending habits, and share your expectations and goals for your money. Use the meeting time to assign money-related tasks, talk about future financial decisions, and review progress toward your long-term goals. This regular investment in keeping your joint financial house in order will pay huge dividends for your relationship.

 

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