The five weeks between Thanksgiving and the first of the New Year account for 20% of our country's annual retail spending. So, it's no surprise that this short window of flurried shopping has a way of bringing about overspending temptations to even the strictest of holiday budgeters. Even if you know the tricks to avoid overspending, like avoiding store card offers and creating and committing to a gift list, tempting deals, unexpected holiday gift exchanges, parties and growing "wish-lists" can quickly derail a holiday budget. But, have you ever thought about the real, long-term costs of overspending each holiday season? Here are some examples of what overspending your budget by $500 each year really means in the grand scheme of things. (For related reading, take a look at Top Holiday Budget Busters.)
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- Delayed Savings
Low deposit interest rates can tempt you into believing that saving isn't even worth it. And while it's true that you won't get rich from interest payments, not saving is lost money. By prolonging the years that you overspend, you are, in turn, delaying the amount of time you build savings.
Suppose that you commit to a strict holiday budget, spend $500 less for 10 years on holiday gifts, and instead put the money in a savings account paying just $1% interest annually. In 10 years, you would have $5,283 saved. Wait two years to begin saving, and you'll have $1,099 less in savings over the course of 10 years.
- Credit Cards
Of course, the big whammy to your holiday budget comes in the form of charging "bargains" that you cannot immediately pay off. Let's suppose that you encounter an irresistible deal offering an additional savings to cardholders. As a result, you overspend by $500 that you cannot pay off in full the next billing cycle. Suppose you make a $50 payment toward the charge each month and your card charges 18% interest. You'll be paying for the purchase right up into next year's holiday gift-buying season, as it will take 11 whole months to resolve the debt. On top of that, you'll have paid $45 in interest.
The situation is far worse if you can only afford the minimum payment of $15 a month. By the time you've paid the amount off nearly four years later, you'll have spent $200 in interest payments.
- Car Payments
It's hard to imagine that a minor holiday shopping spree and auto payments have a significant correlation, but it's true. Imagine you have a 48-month, $15,000 auto loan with a 10% annual interest rate. If you paid an additional $500 each December toward the loan, instead of on holiday purchases you'd own the car outright six months earlier.
- College Savings
You might justify overspending $500 as a small cost for the joy your little one gets from all his or her holiday surprises. But, putting that money toward future college expenses in 15 years can have a much bigger payoff for both you and your child. Dedicating just $40 a month to college savings will amass a nice college nest egg of over $9,000, even if the money is earning a modest 3% over the course of 15 years.
- Certificate of Deposit
While deposit rates are anything but dazzling this holiday season, there are plenty of certificate of deposit products that do not require a minimum balance, and will still get you a lot further than overspending your holiday budget. Suppose that instead of overspending your holiday budget by $500 this year, you took that money and opened a four year certificate of deposit. If it earns 1.64%, and compounds interest daily, in four years, you will not only have the $500 waiting for you, but will have made $34 in accumulated interest, just for not spending. (For more information on credit card blunders, see 6 Major Credit Card Mistakes.)
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The Bottom Line
Advertisements touting "the lowest prices ever" and the pure excitement of spotting the perfect gift can tempt even the most resolute budgeters to veer from their saving missions. But, realizing the real costs associated with those "great deals" helps keep you on track to building the real gift that keeps on giving, financial security, long after the holiday season ends. (For addition reading, check out Money Market Funds: A Better Savings Account.)
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