Saving for the Holidays: Should You Invest?

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The holidays can be a joyful time of year. They are a time for relaxation, celebration and coming together with the people you love most. Unfortunately, all the traveling, entertaining, gifting and feasting comes with a large price tag.

On average, each Canadian planned to spend $1,517 during the holiday season last year, according to BMO Financial Group.

The Problem

All these purchases (travelling, entertaining, food and gifts) obviously need to be paid for. And it is no secret that many Canadians don’t save enough before the holidays roll in to support this budget. More than half of consumers seem to rely on credit cards for at least a fraction of their holiday purchases. They tend to have the “buy now, pay later” mind set when it comes to holiday spending. As predicted, the bill always comes, meaning once the holidays have past, the debt hangover comes knocking.

The Solution

So what should a person do to avoid the problem? How should Canadians prepare financially for the holiday season?

The simplest answer is to start putting aside money, whenever possible, long before the holiday season arrives. For instance, saving $150 per month starting in January would more than cover the average Canadian’s planned holiday expenses. At this rate, just before November, when holiday spending time really starts to kick in, you would have saved $1,500. This is very close to what the average Canadian planned to spend during the holidays last year according to figures, putting them in good financial shape.

How to find that extra $150 per month, you may ask? One idea is to focus on cutting spending throughout the year that you can live without. Perhaps you spend $60 a month on a gym membership you don’t really use. Or maybe you’re dining more than once a week and can cut back there, choosing to eat at home more often. Taking into account your spending habits and creating a budget can help you cut unnecessary spending and put you in better financial shape for the holidays.

For many Canadians, saving an additional $150 a month realistically in not an option given their current situation. If you find yourself in this boat, one way to deal is to scrutinize your planned holiday spending. Just because the average person spends more than $1,500 on the holidays doesn’t mean you have to spend the same amount. Your holidays will not be worse off if you spend significantly less. Travelling less, making homemade gifts, and making meals at home instead of eating out are all ways to tighten your holiday budget in line with your financial means.

Your urge to splurge will literally pay off when you don’t get a massive credit card bill in January. It also means you won’t rack up huge interest charges because you’re unable to pay off your credit card’s balance in full right away.

Investing for the Holidays?

When we hear people talk about investing, we usually think of retirement or a big future purchase such as a car or a house. But is there an effective way that Canadians with savings can maximize their money before the holiday season?

Before answering that question, it’s worth noting that you should match the type of investment with the length of the goal. This means that if you have a long-term goal in mind, your investments should reflect that goal. This sort of mind set tends to favour riskier investments such as stocks that can fluctuate unpredictably in the short term but tend, over the long term, to do better than more basic investments.

On the other hand, short-term investments are most appropriate for short-term goals. Investing for the holidays fits under this category. If you are putting aside money for holidays less than a year away, your number one priority needs to be capital preservation (i.e. don’t lose anything). Any interest you make is bonus.

So what fits the bill for holiday savings? Equities are out but investments such as short-term GICs (Guaranteed Investment Certificates) and high-interest savings accounts are very much appropriate. For example, if you already have $1,500 stored safely away, and you invest this in a GIC paying 1.50% interest, you’ll have an extra $22.50 over the course of a year. That may not amount to much, but it will put you further ahead than if you had just kept your money in a regular savings account.

The holidays can be a wonderful time. And with some solid financial planning, smart spending and clever investing you won’t have a huge bill to go along with all the joy.