‘Tis the season
Marie-Helene Lanoix-Verreault - Dec 17, 2021
As we start this holiday season, it is time to reflect on this last year to help us become wiser. (If we were speaking, you’d hear a mocking tone as I use the words “become wiser.”)
In French, there’s an expression we use: “vieux sage’’. It simply means as we get older, we learn from our mistakes and become wiser. Are you becoming wiser as you get older? I hope so. Let me help guide you to becoming a “wiser you” in your personal finance.
Let’s step back and talk about your holiday budget. It’s a basic expense that everyone should have built into their monthly cash flow projection. Since it’s only once a year, why would it affect your monthly cash flow? Simple, if you don’t plan ahead, you may end up spending it anyway, but on credit.
In my family, I have to think of Christmas gifts for my sons, husband, mother, father, sister, and my five nephews. Then, I have to include the Christmas supper - I usually cook for my whole family. It adds up quickly! If I spend $1,500 for the holiday season, what happens if I hadn’t planned for it vs. if I had?
Option 1 - I borrow it on my credit card:
This means that I owe $1,500 on my credit card, which usually has an interest rate of around 19.99%. After using credit to pay for my Christmas expenses, this means I probably don’t have the spare cash flow to pay it off within the next 30 days (which is usually the grace period not to pay interest). OK, so I will pay it off with my spare monthly cash flow… maybe I have $200 a month to spare? I should be done paying for it in 7.5 months, right? Hold on, you forgot to calculate the interest!
$1,500 at 19.99% = $299.85. Not that bad, so an extra month or so. (OK but with that $299, I could have bought myself a nice Christmas gift too!) This means $299.85 divided by 365 days = 0.8215 cents of interest a day, or $24.64 in a 30-day month.
That’s not all! Did you know that credit cards interest is calculated on the highest balance until you pay it off to zero? Most people don’t know this. If you owed $2,000 on your credit card before you started your purchases for this season, you will pay interest on $3,500 instead of $1,500. This works out to $699.65 interest yearly. I just recently saw a 55” HD TV sold for that price… Avoiding this interest could have bought you a TV! Food for thought.
Option 2 - Cash flow planning!
Yep, you read that right: Cash flow planning. What is your monthly income vs. what are your monthly expenses? Your monthly cash flow planning should include groceries, car expenses, housing costs, retirement planning, children’s education savings strategy, family protection, etc. I strongly believe that it should include a monthly allocation for unexpected and expected future expenses. Take that $200 a month and transfer it to a regular savings account and this gives you $2,400 of cash flexibility a year that you may need for the holiday season.
Overall, the goal is to cherish the time spent with your loved ones, and not lose sleep over the cost that occurred.
Lately, we also hear about other gift ideas to consider, like recycling good condition items by gifting them, baking/cooking the family supper for grandma to help her as it gets harder for her to cook all day, gifting new items that were never used, and of course, time with your loved one. Not only is that financially sound, but it helps our planet! I read somewhere last year to gift a maximum of six things to your children for Christmas. It should include something to read, something to wear, something to play, something they requested, one recycled item and most importantly, your time.
It’s my personal opinion, but I’m always afraid of spoiling my son too much. Teaching him the value of money matters more than a pile of stuff that he will probably play less with than the puddle of mud outside or the big “camp” that we did with the boxes in the garage. My time means more to him than gifts will ever do.
Marie-Helene Lanoix-Verreault, CFP®
Financial Security Advisor
Sigouin Financial Group Inc.
Quadrus Investment Services Ltd.