Preparing Your Finances for the Holidays

As the holiday season draws near, many people are revisiting their finances over the next few months and preparing their budgets to celebrate the most wonderful time of the year. This season is the perfect opportunity to consider where your finances stand and gives you the chance to make a fresh start, if needed, ahead of the new year.

Let’s use this month to celebrate the importance of proper financial planning. Keep reading for some tips and tricks to get your financial planning in order.

Create a Budget

The first step to taking control of your finances is creating a budget and sticking to it. Everyone’s budget will look a little bit different depending on their needs, but the 50/30/20 rule is a good place to start.¹

The 50/30/20 rule states that 50% of your budget should go to essentials, such as rent, food, and utilities; 30% should go to wants, such as entertainment or travel; and 20% should go to savings and paying off debt.

There are many helpful apps to help you stick to your budget, such as Mint, You Need a Budget (YNAB), GoodBudget, and, if you budget with a partner, Honeydue. Whether you need a simple budget or one that’s more complex, there are both free and paid app options out there to suit you.

Be Smart With Your Debt

You may have heard that debt is bad and that you shouldn’t take any on under any circumstances. However, not all debt is created equal, which means debt isn’t always a bad thing if you are smart with it. For example, if your car needs to be replaced, taking on a car loan and making all the payments on time can help you afford this necessary purchase if you don’t have enough money to pay cash, and consistent, on-time payments can help you build your credit score.

Another example is purchasing a house with a mortgage loan because the monthly payment is less expensive than renting an apartment; making your payments on time will build equity that you can use later. But be wary of high-interest debt because that can quickly get you into trouble.

Understand Interest Rates

Speaking of interest rates, it’s important to understand how they impact your finances and debt. Depending on the current market and your credit score, mortgage rates generally hover between 3% and 6%. In contrast, the average credit card interest rate as of March 2022 was nearly 20%. It’s clear how rates that high can make credit card debt quickly pile up and become difficult to manage. Out of control debt can make it hard to take control of your finances.^2,3

In addition, understanding interest rates can help you make strategic financial planning decisions. Rather than paying all cash for an asset (e.g., a car or a house), if you can get a low-interest loan, you can consider investing the cash you would have spent in an investment vehicle that could generate a higher return than you will pay in interest.

For example, if you have $10,000, you might consider putting $2,000 toward a car and financing the rest at a 2% interest rate while investing the other $8,000 in the S&P 500, which has delivered a compound average annual growth rate of 10.7% per year over the past 30 years.⁴

Get Covered by Insurance

Lastly, another thing you can do to reevaluate your finances is to ensure that you are properly covered with the right insurance. If you have dependents or people relying on your income, life insurance is a must-have. Life insurance can ensure that the people you love will be taken care of if something were to happen to you. In addition, you should consider renters or homeowners insurance, car insurance, disability insurance, and health insurance. Although insurance premiums may seem like an extra, unnecessary expense, in many cases they can protect you from paying enormous out-of-pocket costs in the event of an emergency or accident. 

There are many things you can do to take control of your finances ahead of the holidays, and these are just a few. Start the holiday season on the right foot by strengthening your financial fitness.