That’s not sleigh bells you hear jingling, it’s the last few coins rattling around in your piggybank.
Christmas, the most marvellous time of the year. Everyone is stressed out and tired, counting down the days until they can sleep in. Family are planning to visit, presents need to be purchased, and the bank balance is looking low. Tinsel is on the tree, but you’re feeling anything but festive.
Everywhere you look, there’s Christmas advertising; your mailbox, TV, radio, social media… and it’s all wanting you to spend, spend, spend. It can make you feel like you should be doing more; bigger presents so the kids don’t feel inadequate, more food and wine for a luxurious celebration… there’s a lot of pressure to celebrate a certain way and spend way more than you want to.
It doesn’t have to be this way. A good financial plan will let you celebrate Christmas, but not leave you short on cash (or, even worse, in debt for months to come). There are eight simple components to a great financial plan.
1. Set your financial goals
There should be three sets of goals: short, medium, and long term. The long term ones cover ones like retirement and uni fees for the kids. Medium term are four to seven years in the future, like starting your own business.
The short term ones relate to anything in the next three years. Could be buying a brand new car, or planning a Christmas with the whole whānau.
Whatever these goals are, write down the date you’re planning for, and the dollar figure that you need. You want to have specific, measurable goals. This helps you avoid that Christmas overspend by having firm limits, and knowing it will impact your other goals. What’s more important—that holiday you’ve been dreaming of, or a few extra cheap presents that don’t last more than 24 hours anyway?
If you struggle with this, seek help from a professional financial adviser.
2. What’s your net worth?
You need to set a baseline—so you need to know exactly where you are right now. List all your assets (property, vehicles, businesses, bank accounts, retirement funds) and liabilities (student loans, mortgages, credit cards, any other debt).
Assets – liability = net worth.
This could be incredibly discouraging if your liabilities are bigger than your assets. But don’t be disheartened; it’s not uncommon when you’re starting out, particularly if you have student loan debt. A financial plan will also help you turn this situation around.
3. Build that budget
There are a number of reasons that budgets are brilliant. They help you plan for the future, can get you out of debt, help you control your spending, and resolve arguments. They are also pretty simple to create, so spend a few hours hashing out a budget that works for you.
Think about your Christmas budget too, so you know how much you’ll need to save throughout the year.
- Travel expenses if you are going to another town (or country)
- Food and alcohol cost for the day
- Food costs extra if you have family over for the holidays
- Presents: set a dollar limit for each kid or adult. Then add up the entire whanau
- Christmas decorations
4. Manage your debt
Everyone has debt, and it’s not always a bad thing; using the bank’s money to buy an appreciating asset is good and helps to build equity. But, consumer debt in the form of high interest credit cards is bad. Really bad.
Create a plan to get out of debt as fast as possible. Consider a debt consolidation loan if you have room on your mortgage, or else simply go hard on repaying the high interest debt first.
Christmas is not an occasion to ruin your family finances. If you don’t have money for a big Christmas, don’t put it on your credit card and add to the problem; you’ll only end up paying for your Christmas all year.
5. Plan for your retirement
How much do you need to retire? The old rule says you’d need 80% of your current income to live comfortably in retirement. But that assumes you are mortgage free, your kids are financially independent, and you have less expenses to do with work.
You also need to plan for long term care and any travel or adventures you have planned.
6. Have a savings stash
Emergencies happen. The car breaks down, you get sick and can’t work, or there’s a family emergency and you need to travel. Plan to have at least three months’ worth of living expenses in savings. Make sure it’s in a highly liquid form (like a bank account or available credit on your mortgage account) that you can access immediately if you need to.
Christmas isn’t an emergency so don’t be tempted to dive into your emergency stash to fund it. You need to save for it separately. You may choose to have a ‘Christmas fund’ jar, savings account or even buy your local supermarket’s Christmas club vouchers which allow you to buy whatever you want at Christmas time and take advantage of specials. A word of warning… If you buy the third-party pre-paid hamper/ gift packs that you contribute to throughout the year, you end up paying a lot more per item and they end up being very expensive. These are best avoided.
7. Get insured
Insurance is important because we can’t predict the future. A car accident, an earthquake, a terminal medical diagnosis. You need to strike that fine balance between covering everything that needs it, and not going overboard and over-insuring. Generally:
Health insurance: While the NZ medical system is free, private healthcare means you won’t be stuck on a list, waiting for surgery that’s deemed ‘non essential’. You can get on with life.
Car, contents, and home insurance: This is the very basic package you should have. If your home burned down, could you afford to replace everything? If an uninsured driver t-boned you, how do you get to work the next day?
Life insurance: If you have kids or partner who is dependent on you and your income potential, life insurance is a must.
Income protection insurance: If you couldn’t work tomorrow, and your sick leave ran out, how will your family survive? Would you be able to pay the bills for as long as it took to get back to work?
Disability/ trauma insurance: If you have an accident and are unable to work, these lump sum policies mean you don’t need to worry about money.
8. Estate planning
At the very minimum, you need a will which states your final wishes. That includes allocation of assets, instructions regarding young dependents, and who administers your estate.
Remember to tell people where your will is (the name of your lawyer), which insurer holds your policies, and details of your bank/ investment accounts.
Also think about arranging power of attorney before you become incapacitated, as this can be a long process.
It’s easy to overspend at Christmas
Even with all the budgets and planning, it’s easy to overspend at Christmas. You want the very best festive season, and the kids all want expensive gifts. Retailers do their marketing so seductively, it’s hard to resist. However, a great financial plan helps you avoid overspending.
There are a few more strategies to minimise your Christmas spend:
- Agree to only buy gifts for the kids. Adults don’t need loads of presents
- Or, have a secret santa, where each adult draws the name of another adult and buys only for them (to a certain dollar limit)
- Consider making home-made gifts for neighbours, teachers, and friends; coconut ice, gingerbread people, or Russian fudge are all delicious ideas, or maybe making a Christmas tree decoration
- Christmas meals, do a pot-luck. This also saves a tonne of food preparation
- Have one gift for each kid, and inside is something they want, something they need, something to wear, something to read
Start planning for your next Christmas now. Have goals, budgets, and a financial plan that means you can have the Christmas you want, without the financial stress.