There are expenses in life we can’t plan for and that’s why we have a rainy-day fund. But there are also many expenses that we can plan for and just don’t. The holidays are a perfect example. They come around every year and yet more than half of us get stressed out about money around the holidays.
We spend more than we plan or expect. Cash ends up feeling tight, we have to pull money from savings, or we put the extra expenses on a credit card that we have to deal with later. It takes away from this joyful time and ends up causing us a lot of stress.
The good news is, we can create a holiday budget to plan in advance. The sooner we start, the less pain we feel financially.
Here’s a step by step plan to create a holiday budget that you will actually stick with. You can use these steps to plan for any other large expense as well!
Step 1: What’s important?
Before we can jump in to create our holiday budget, we want to get clear on what’s important to us about the holidays. This will look different for each of us. Ask yourself the following questions to get started:
What are your favorite holiday memories?
What made those memories special?
Make a list of the things that are most important to you. This will look different for each of us. If you are creating a holiday budget with a partner or your family, make sure to bring them in on the conversation. When we’re clear on what’s important to us about something, we can honor the important parts and let go of the non-important parts.
Looking back on previous years, you might notice that you spent money in areas that weren’t actually important. This isn’t necessary and doesn’t add any additional joy to our lives.
Step 2: What do you want to spend?
With your list of what’s important in mind, go through and think about what you want to spend money on this year for the holidays. For example, you may want to buy gifts, travel, host a party, account for extra dining out, purchase party clothes, or need to pay for additional transportation.
This list will be the backbone of your holiday budget. If you aren’t sure about something, include it on the list for now. You can always remove it later.
Step 3: Run the numbers.
Now it’s time to add numbers to your holiday budget. For each item on your list you want to spend money on, write down how much you want to spend. Get specific and add up the numbers.
For example, if you listed gifts above, how many gifts do you plan to buy? What will you plan to spend on each gift? If you decide to buy five gifts and each costs $50, that’s $250 in total gift spending.
Something that often holds us back from making a holiday budget (or any budget) in this kind of detail is that we aren’t quite sure what some things will cost. For example, it’s hard to guesstimate how much a flight will cost until it's time to book. That’s okay!
You can always revisit and adjust these numbers over time as you know more. If you have a cost range in mind, go with the higher end of the range so you are pleasantly surprised if things cost less.
Go through and estimate the cost of each item on your holiday budget list. Don’t be afraid to get into the specific details - like the cost per gift or the number of extra Lyfts you’ll be taking after holiday parties.
Step 4: Get fabulously frugal.
Once you add up your holiday budget you might be happy with the total or most likely will wonder if there is a way to decrease the total amount. We only get to spend each dollar we have once, we might as well maximize the joy we get per dollar spent.
Enter the concept of making something fabulously frugal. To make something fabulously frugal we want to strategize how to reduce the amount it costs without sacrificing the quality (or better yet, even making it better).
Here’s how. Going along with the gift example, instead of getting five gifts, you might decide to do a White Elephant Exchange where everyone gets someone a $50 gift. This adds some excitement to the process and removes a lot of the financial stress. Now you’ve reduced your total spend from $250 to $50 in the gifts category.
Step 5: Create the space.
Next you want to create the space to start putting money aside for your holiday fund. I recommend opening a separate high-yield savings account specifically that you can name “holiday budget fund” or whatever makes sense for you.
You can do the exact same thing with any of your other large, less frequent expenses. These are called sinking funds.
Step 6: Consider your income.
In order to figure out how much you want to contribute to your holiday fund, you’ll want to count the number of paychecks you have until you plan to start making purchases. Look through the calendar and count them out.
Next year, you can start setting aside money right after the holidays. When you contribute to your sinking funds year-round, you can put less money aside per paycheck and still set aside the same amount. It’s magic!
Step 7: Map it out.
Next we want to calculate it out. If your holiday budget is $500 and you have five paychecks until you plan to start spending it, you’ll want to put aside $100 per paycheck. If you have ten paychecks left, you’d set aside $50 per paycheck. You can also calculate contributions on a monthly basis.
Step 8: Make it automatic.
To make our lives easier, we want to set up these contributions to happen automatically. Have whatever amount you calculated per paycheck (in step 7) transfer automatically to your holiday fund each paycheck or each month. Then the cash will be there waiting when it’s time to start your holiday spending.
Step 9: Use your holiday budget fund.
Now that we have this wonderful holiday fund, how do we actually use it? There are a couple of ways that work well.
When you’re ready to start spending, transfer over the money from your holiday fund in advance. That way you can spend the money you set aside directly.
You can make the holiday purchases like you would any other purchase (on your credit or debit card). Keep a tally of what everything costs and then transfer taht amount from your holiday fund. This way works well if your holiday spending tends to be more spread out.
Think about which way will hold you most accountable to stay within your budget. Also take into account how you like to run your spending and tracking.
Step 10: Plan ahead for next year.
Now that you’re a pro, you can plan even farther ahead for next year’s holiday budget. Ideally, setting aside money to your holiday fund is something you will be doing year-round. That same $500 holiday budget would only be $19 per paycheck if we had the money transfer over year-round (26 paychecks).
The earlier we create our holiday budgets and start setting aside money, the more we minimize our holiday money stress!