Avoid Holiday Debt with These 6 Expert Tips (Even If You Have $0 Saved)
It can be hard to imagine a snowy holiday season when the temperature outside is above 90 degrees Fahrenheit. However, many financial experts recommend starting to save for the holidays now to help soften the blow to your budget.
According to the U.S. Treasury Department, American families are expected to spend $975 on holiday shopping in 2023. The Latest Gallup PollsThat’s up from $875 in 2022, according to US Census Bureau facts.
Putting aside almost a thousand extra dollars is a big task, so it’s crucial to find smart ways to save now. Otherwise, you could start the new year with credit card debt and struggle to pay off your mounting balances.
“The holidays fall around the same time every year, so let’s prepare for them,” said Jannese Torres, author and money coach.
Here are six tips from CNET Money’s expert review committee to help you save money this holiday season.
1. Set spending limits
Before you plan your holiday budget, this is a good time to discuss expectations with your friends and family about gifts and plans, says Shang Saavedra, founder and CEO of Save My Pennies, Inc..
“On my side of the family, my parents and I don’t really give each other Christmas gifts because we find the tradition kind of redundant, so it also saves me the hassle of buying two gifts,” Saavedra said. “On my husband’s side of the family, we do gift cards for all the adults, which makes things a lot easier.” The thought is important, not the extravagance, she added.
Talk to your family now to set gift budgets. If you have a large family, you might suggest having a Secret Santa or White Elephant so everyone only buys one or two gifts. You can also use these strategies to save money when exchanging gifts at work or with your group of friends.
2. Make a plan and stick to it
To curb overspending, make a plan and stick to it. It can be tempting to spend a few extra dollars to get someone a gift we really want, or because it’s a good deal. But a budget can help curb overspending and get you thinking creatively about how to stretch your savings.
Torres recommends starting by making a list of the people you want to buy gifts for, creating a clear budget for each person, and shopping sales to save money on gifts.
3. Create a sinking fund
A sinking fund is a savings account where you can put money toward something you’re looking forward to, like an event, vacation or even the holidays. If you don’t have one yet, a high-yield savings account is a great place to put savings because it pays a higher interest rate than a regular savings account, Saavedra says.
“A high-yield online savings account is great because your savings can earn interest and because it’s a separate account from your checking account, you’re less likely to spend the money.”
Torres added that HYSAs also have some built-in benefits. “A lot of HYSAs are online-only banks, which means you can’t just walk into a branch and withdraw your money,” she said. “You typically have to transfer the money to a checking account to withdraw it, so it can help curb the temptation to dip into that money randomly.”
There is another compelling reason to open a separate savings account. Lanesha Mohip, a business accountant and finance educator, recommends opening a new savings account to keep your vacation fund separate from your other financial goals and bills. “This is an easy way to reduce impulse purchases while ensuring your priorities are being met,” she said.
4. Automate your savings
Saving money can feel like a chore, but automating your savings takes some of the hassle out of it. Every dollar adds up to help you comfortably afford gifts, travel, and decorations.
Saavedra said that making monthly deposits can help you put away more and avoid debt. She recommends making regular monthly deposits into your savings fund, based on how much you plan to spend. Setting up automatic transfers to your savings account can make this easier.
If you’re not sure how much you want to automatically transfer to your savings account, calculate how much you plan to spend and divide it by the number of salaries you receive before you go shopping.
Let’s say you plan to spend $600. If you do most of your shopping on Black Friday and there are six pay periods between then and now, you’ll need to save $100 from each paycheck to reach $600 by then. That doesn’t include any interest you earn on top of that.
5. Put your money in a short-term CD to avoid expenses
If you already have a sum of money set aside that you want to earn guaranteed interest on and you don’t want to spend it, you might consider putting it into a one-month or three-month deposit. CDs let you lock in an interest rate when you open your account in exchange for letting your money sit there for a set period of time.
Based on our weekly tracking, high yield savings accounts currently offer an average APY of 3.77%. Some banks offer even higher rates, such as Basque Bank (5.10% APY) and Next Bank (4.54% APY). While high-yield savings accounts currently offer higher rates, a CD can still be beneficial.
CDs are a great option if you want to trick your brain into not touching your savings, Saavedra said. “You get a certain amount of time where you feel obligated to put the money in the CD and wait,” she added.
Another advantage is that if you are worried about falling interest rates in September, you can lock in a CD now to protect your interest income. A CD is also a good option if you want to avoid spending your money for the holidays.
Make sure you don’t need your money before the CD term expires. Holiday sales seem to start earlier every year, so if you want to get in early, you’ll pay an early withdrawal fee if you withdraw money from your CD before the term expires.
6. Buy early, but keep saving
Should you shop or save? That’s the million-dollar question. Mohip said a little of both is a smart way to save money without depleting your savings and to take a balanced approach that works best for your lifestyle.
“If you shop early, you can take advantage of specials and spread out your purchases. If you save longer, you have more time to build interest and more flexibility in your budget.”
Another reason to shop early? Mohip said it gives you more time to maximize credit card rewards, cashback programs and other smart savings strategies.
Since holiday deals are available early in the fall, you can also take advantage of them to stay within your budget.
Torres agrees, saying that shopping early is a good way to avoid paying top dollar for gifts because you’re in a hurry. “By spreading out your shopping over a longer period of time, you can spread out your spending and take advantage of sales,” she added.
