Start Saving Now for Next Christmas

Believe it or not, now is the time to start saving for next Christmas.  Christmas is a large expense, and you should be planning for it year round.  A few weeks ago, I mentioned how to set up a Christmas budget.  If you haven’t done so already, set up a new savings account for Christmas, and transfer 1/12 of your determined Christmas budget into that account today (or on the next pay day).  Then, set up automatic transfers on the first of every month for the same amount.

If you follow these simple steps now, you’ll barely  notice missing the money throughout the year.  You will feel much, much more relaxed come December though, since you won’t have to worry about how you will pay for everyone you buy for Christmas.

Saving for a Baby

My wife and I just recently announced that we are going to have a baby, due on July 27th.  We found out about a week before Thanksgiving, but haven’t mentioned it to anyone until Christmas.  We wanted to wait until after 8 weeks, to reduce the risk of telling people and then having to tell them again if something bad happens.  We read that 25% of pregnancies end up in an abortion within the first 8 weeks, so we decided to wait until Christmas.

We’re both really excited about having a baby (it’s our first), but I’m going to focus this post on the financial portion of having a baby.  My wife works full time, and she plans on taking the 12 weeks off allowed by FMLA.  She won’t get paid for those three months, so it’ll be just my salary.  We also need to get clothes, furniture, etc. before the baby arrives.  As I just mentioned in my last post, my goal is to make a significant reduction in our debt this year.  But we also need to save some money for the new family member we will get halfway through the year, and here’s how I plan to do it:

  1. We are saving $100/mo just for baby costs.  Since we budget our money on a monthly basis, we both get an extra paycheck every 6 months (mine happens to be in July).  I will take our entire extra paycheck and add that to our baby fund, too.  This money will account for doctors visits, along with furniture/clothes/diapers needed right when the baby is born.  Luckily, my work has good insurance.  I talked with someone who recently had a baby, and they told me I could expect to pay ~$530 for the entire hospital bill ($30 for the initial visit – all other visits are considered follow up, and $500 for delivery costs).  The rest should get us started with furniture, clothes, etc. for when the baby’s born.
  2. To cover the 3 months my wife will not be working, we will cut back in some areas, and save up some before that happens.  We already have 2 months of an emergency fund saved up, and I plan on saving at least $300/mo for the last 6 months to help cover expenses.  We will not pay extra toward debt while she is out, which could hurt my financial goal for the year, but it will not drain our emergency fund during that time.  We will also have one of our student loans paid off by July, so that’s one less expense we’ll have to pay.  I figure it’ll be harder to save after the baby is born, as more expenses will come our way.

I know this approach isn’t perfect, but it’s what we can reasonably do to prepare for the baby coming our way.  I think it’ll help get us started, and we’ll deal with some unexpected costs along the way.  People that have had babies keep telling me that the first one doesn’t hit you much financially, but the second one does.  I’d still like to be prepared, just in case that’s not the case for us.

Budgeting Basics – Spend Less Than You Earn

Ok, I’m going to talk about the dreaded “B” word – budgeting.  If you want a better connotation for the same thing, use something like “cash flow.”  It’s all the same.  Budgeting is a necessity in life that most people just don’t grasp (or don’t want to even try).  It’s really simple though: simply spend less than you make.  That’s what it all comes down to.  I’ll help you get started though.

First, start tracking every dollar you spend.  This includes everything from mortage, rent, car payments, and insurance to buying groceries and eating out to morning coffees, sodas, vending machines, etc.  Everything you spend needs to be tracked.  You can use a program like Quicken or YNAB to do this, or you can simply use a spreadsheet like Microsoft Excel or Google Docs.

Once you track your spending for one month, take a look at where your money has gone.  Add up all your expenses, and add up all your income.  Did you spend more money than you brought in for the month?  If so, you aren’t alone.  This is the reason why most people have so much money on their credit cards.

Start looking in detail at where you spent your money.  Where can you cut back, even if it’s just a little next month?  Did you eat out a lot this month?  Maybe you could cut it back, even if it’s just $10 or $20.  Do you eat out every day for lunch?  Maybe you could pack your lunch a couple days a week.  Do you spend money on things you don’t actually use, like a gym membership, Internet usage or text messaging on your cell phone?  Those premium channels, like HBO, Showtime, etc?  Do you get coffee at the local Starbucks, or buy a soda every day at work?  If you find things you are paying for that you don’t use, try removing one of them next month and see how it goes.  You may find out that you really can live without it.  If you find yourself wishing you had it back, add it back.  Try cutting one big item out of your spending for the next month, and try to cut back 10% on one additional item (such as eating out). Doing this starts you down the path of living on less than you earn.  Once you start thinking about things in this manner, you’ll be able to find lots of little ways to cut back that can end up saving you a lot of money.

Okay, so now that you see where you’re spending your money, how does it compare to what it should be?  Group everything into a high level category of fixed costs (such as mortgage, rent, utilities, car payments, credit cards, groceries, gas, etc.), fun money (eating out, drinking, clothing, etc.), retirement (401k, Roth IRA, other investments), savings (emergency fund, vacations, house down payment, etc.), and giving (Christmas presents, birthday presents, religious giving, etc.).  This gives you an idea of how much you should be spending in each category:

Fixed costs: 50 – 60%
Fun money: 15 – 30%
Retirement: 10 – 15%
Savings: 5%
Giving: 10%

After only one month of tracking, you may not fit directly into these categories.  After tracking for a while though, you should fit pretty close.

If all that seems way too complicated, simply live off of 80% of what you make, and put the rest toward giving and saving for retirement.  It all comes down to one simple thing: spend less than you earn.  If you can get to that point, things will be much easier.  You will be able to pay down your debts, start to save money, and you will not be stressed about money as much.

Christmas Budget

If you’re like most people, you run up your credit cards during the Christmas season.  Hopefully, you don’t still have money on your credit cards from LAST Christmas.

For my wife and I, Christmas is a large expense.  We exchange gifts with parents, grandparents, brothers and sisters, and nieces and nephews.  We found a system that works really well.  I created a spreadsheet with the names of people for whom we buy gifts.  I list a dollar amount for each person, and that’s our budget for Christmas.  When we buy a gift, I record the total (including tax and shipping, if applicable) into another column, and we make sure we don’t go over the budgeted amount.  I also keep a little column for what the items actually were.  When Christmas is over, I wipe out all the information, so it’s ready to go for next year.

So, we have this budget we use every year, but how do we avoid going into debt with all the gifts we buy?  We save 1/12 of what our budget is every month.  You can do this in several ways.  You could open a separate account, and automatically transfer 1/12 of your budget into it on the first of every month, or you can use a more holistic approach, and budget all your expenses every month.  I’ll cover budgeting more at a later date.  This approach eliminates all the stress the holiday season puts on your finances.

If you are one of the millions of people who get stressed out about money this time every year, take the following steps to be able to really enjoy the next Christmas season:

  1. Create a list of everyone  you bought (or are planning on buying) a gift for this year, along with how much you spent (or plan to spend)
  2. Create a new spreadsheet (you can use Google Docs if you want, it’s free!) with the following columns:
    – Name
    – Budgeted Amount
    – Amount Spent
    – Items
  3. Fill out the Name and Budgeted Amount columns for each person on your list
  4. Set up a savings account (call it Christmas)
  5. Set up an automatic transfer on the first of every month, starting in January, that’s 1/12 of the total amount of what’s in your Budgeted Amount column

Then when next year rolls around, just pull the money back out of your savings, and you will have a stress free Christmas season (well, financially… I can’t speak for the other things that could cause you stress during this season).