It is really unfortunate that Christmas has become a time where people go into debt to buy gifts for others. Hopefully, most of the people in your life would rather just spend some time in your company than receive a gift anyway. Many casual acquaintances and extended family members may actually be wishing you would stop giving gifts so that they would not feel obligated to buy one in return. Still, many people feel they need to buy gifts, and of course children will be expecting things under the tree.
One way to avoid going into debt to buy presents and to set a limit on your holiday spending without turning into a Scrooge is to create a Christmas gift fund. Banks used to have Christmas Savings accounts – some credit unions still do – to allow people to set aside money for Christmas gifts. A Christmas gift fund is like this, only improved in that once it is established it creates income for gifts on its own. Here’s how it’s done:
1. Pick a broad-based stock index mutual fund. Think something like a total market fund, an S&P500 fund, or a Smallcap fund. Perhaps even choose a couple of different funds to provide additional diversification.
2. Determine about how much you would like to spend for gifts each year. Multiply this by 20. This will be your target amount. For example, if you planned to spend $500 for gifts this year, your target amount would be $500 x 20 = $10,000.
3. Open a mutual fund account and buy one or more funds. Note you’ll need to have at least the minimum for the fund, which might be $3000-$5000. You’ll therefore likely start with one fund and then diversify more in later years.
4. Throughout the year, add money to your mutual funds each month. For example, if you can set aside $150 each month (maybe eat a few more lunches and dinners in), you can add $1,800 to the funds during the year. Also, think about directing a good portion of any bonus money you receive during the year to the gift account until it is well established. The faster you can build up the balance and reach your goal amount, the more your money can be working for you during the year.
5. In late November or early December, withdraw $500 or 5% of the value of the account, whichever is less, for gift money. If there is a deficit in the early years, make this up with other cash from work earnings. It may take two or three years to reach your goal of fully funding the account.
Once the account is fully established, you should now have a lot of the costs of gifts “paid for” by income from the gift account. This means that you will not need to worry about where gift money will come from each year, and it also provides a way of establishing a reasonable budget for gifts. Over time you will save a tremendous amount of money, not just because you’ll be receiving money from the gift account for gifts rather than needing to earn the money through work, but also because of the money in credit card interest you will be saving.
As you start getting more income from your job and your gift needs start to grow (you start to have older children whose gift desires are bigger and you and your spouse start to be able to afford some nicer things), you can keep building up the gift account with your income. This, combined with the appreciation of the account, which should exceed your withdrawals and inflation a little, will allow you to grow your gift budget.
Keep this up and eventually the money you can withdraw from your gift account should far outweigh your need to buy gifts. Perhaps the children have grown and have moved away and you and your spouse are happy with what you have and need little else. At this point the gift account can be changed into a charity account. You can start giving the 5% to charities, friends in need, or even random people you see who look like they need a little help during the holidays (like the current “Tips for Jesus” movement, where people are giving huge tips to waiters and waitresses). By taking care of your own finances, you free yourself to help others like few can.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.