Holiday cards have been addressed. Wrapping paper and frilly bows are at the ready. You can almost hear the strains of “It’s the most wonderful time of the year.” It’s easy to get caught up in the moment. That is—until January, when your credit card statement arrives and your tune changes to one sounding more like Mr. Grinch. There is a better way to manage holiday spending and your budget.
Gather Price Tags of Christmases Past
A 2015 Gallup survey reported that the average person spends $830 on Christmas, a 15 percent increase from the $720 spent in 2014. Tack that on to routine monthly expenses and those bills that always come at year-end (such as property taxes)—and you find yourself channeling Ebenezer Scrooge. You can help ease holiday financial stress by reviewing your own spending.
Keep track of what you actually spent to give you a baseline for this year’s budget. And, it will help you identify where to adjust. Don’t forget to include expenses for cards, postage, gifts, food and outings. Then get started on a plan. Determine how much you’ll spend on each person, parties, etc. and write it down.
Kyle Barclay, an Investment Consultant with American Century Investments, routinely shares this advice with his clients. He recognizes creating a holiday budget may not be on the top of your wish list, but a plan can help you stay on track without loading up credit cards, or worse, dipping into retirement savings. If you don’t usually budget, this is a great time to start—before the mad rush of the season.
Cross Retirement Dollars and Credit Cards Off Your List
If you think tapping your retirement account for the holidays won’t hurt you, think again. It’s not just another account; these savings are meant to help sustain you through retirement. Withdrawing money from retirement assets can hurt you in a few ways:
1. You Have Less Money for Retirement
“Think of your money as soldiers building an army for the future, prepared to combat whatever expenses you may face,” Barclay says. “The more money you have working for you, the bigger the army becomes. Withdrawing money from your savings is effectively taking soldiers out of your army.”
2. You Open Yourself Up to Potential Tax Penalties
Unless your situation meets certain criteria as determined by the IRS, the penalty for withdrawals from a retirement account is 10 percent, plus you will have to claim the amount as income on your tax return.
3. You Have Less Money to Ride Out Market Cycles
“Less money in your retirement accounts means you have less to grow in up markets,” Barclay says. “Consequently, withdrawing from retirement accounts can be a significant twofold blow to your financial health.”
Credit cards for holiday spending aren’t a good solution, either. They make it too easy to overspend with a swipe or dip of the card. Plus, you become immune to how much you actually spend, especially if you only pay the minimum. You could end up spending double what the items actually cost.
Avoid the pitfalls of the holiday frenzy. With a plan in place, you shouldn’t have to tap a resource that could result in IRS penalties, higher taxes or high interest rates.
364 Days Left – Time to Plan
By planning ahead, you can learn to trim your expenses not only during the holidays, but throughout the year. Instead of having that latte or lunch out, you can sock away what you would have spent. Barclay recommends saving the money separately so you can see the progress you’ve made for holiday spending and any other short-term expense (i.e., a vacation, updating an appliance, etc.).
Checked it Twice? You’re Done
Once you’ve made your list, checked it twice and finished all your shopping, turn your attention to enjoying time with family and friends. Marketers will continue to entice you with deals; avoid the temptation of falling into the “one more gift” or stocking-stuffer trap.
Choose Spending Time Over Spending More
A holiday spending plan gives you a blueprint for the year to come. But it’s not limited to holiday spending—it’s also a smart way to approach all of your financial planning. Remember, it’s not a “pass or fail” approach, either. If you don’t hit your budget, don’t assume it’s a fail. The purpose of the plan is to track where you may be overspending to refine your habits or your budget.
Remind yourself that holidays are special because of the time you spend with people.
Please consult your tax advisor for more detailed information regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59 ½.
The opinions expressed are those of Beth Allwood and are no guarantee of the future performance of any American Century Investments fund.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.