Christmas Is Coming. What's Your Plan?
Every year, thousands of well-meaning individuals get themselves into debt because they used credit cards to buy Christmas gifts for their family and friends.
If they’re lucky, they pay off the debt in just a month or two. More likely though, it takes them many months or even a few years to pay their Christmas bills.
And the next year when Christmas rolls around? The same. The cycle never ends, leading to debt, stress, and worry every year at Christmas. No wonder the holiday season stresses everyone out.
If you’d like to stop going into debt every Christmas, the solution is simple: Use a sinking fund.
A sinking fund is a method of saving money for a future event, so you won’t have to borrow money to pay for it.
It doesn’t take much to prepare a sinking fund for Christmas. First, count (or estimate) how many gifts you’ll be buying this year for Christmas. Then estimate how much you plan on spending for each gift. Total those dollar amounts to get your grand total for how much money you will spend on Christmas gifts.
For example, let’s say you plan on buying two gifts for 12 different people. You decide that you will spend an average of $25 per gift. Your estimated total for buying gifts is $600 (24 gifts at $25/each).
Next, divide your total by the number of months until you start your Christmas shopping. We’ve got nine full months until December 1st, so we’ll divide $600 by nine. The answer is just under $67.
If you save $67 each month until December 1st, you’ll have your $600, plus a bit of interest. At Christmastime, you’ll have less stress and the peace of mind that comes with knowing you paid for all of your gifts with cash.
To make it easy, check to see if your workplace offers a Christmas club option. If it does, the amount you indicate will be automatically taken out of each of your paychecks. Then you’ll receive it all back in an extra paycheck, probably in November. Or you could open a free savings account, and have a portion of your paycheck automatically deposited every pay period.
If you don’t use a sinking fund, then you’ll have to borrow money to buy your gifts. Let’s look at what that will cost you.
If you spend the same $600 using credit cards, and you pay only the minimum payment, you’ll pay over $200 in interest and it will take you around forty-six months to pay it off. Do you really want to be paying for your 2020 Christmas gifts in 2023?
If you paid much more than the minimum, say, $100/month, then you’d pay it off in seven months and would only pay approximately $31 in interest. But if you could afford to pay $100/month, why not just put $67/month into your sinking fund for the previous nine months instead? That way, you won’t have to pay any interest.
The great thing is, sinking funds can be used for any upcoming event, not just for Christmas. Planning on buying your first house in a few years? Establish a sinking fund now for the down payment. Know your car won’t last more than two or three more years? Ditto. Going to have your first baby, redo the kitchen, or- here’s a good one- going to send someone to college someday? Start saving now.
Using a sinking fund requires nothing more than a bit of simple math and the willpower to actually save money each month to meet your goal. If you follow through, then you’ll have the satisfaction of knowing you are fully financially prepared for your upcoming event.