Which Christmas carol best captures the spirit of the holiday? How about this one:
Tis the season to spend money, fa lalalala lalalala.
Charge the tree, pay cash for presents, fa lalalala lalalala.
Can’t keep track of the dollar and cents, fa lalalala lalalala.
Still have to pay a mortgage or rent, fa lalalala lalalala.
You don’t have to be a Scrooge to have mixed feelings about Christmas. It’s awesome — my favorite holiday. But, man, is it expensive! And could it come at a worse time of year? Your annual family budget has been battered and bruised all year long, and then — oh, yeah — don’t forget about those year-end holidays with their seemingly endless expenses from presents to food to travel to entertainment to cards to decorations.
It’s stressful, for sure. But here’s the thing. Even a plush holiday isn’t going to break you — if you have been smart about your overall financial strategy. In other words, if you are pound-wise, it’s OK to be penny-generous now and then. Here are two strategies to ensure you are indeed being pound-wise.
TSL Budgeting. A well-crafted budget is the cornerstone of financial planning. Once you know where all your money is going, you can make informed decisions to ensure it is being spent to meet your needs, and further your long-term goals. If you are overwhelmed by the notion of creating a detailed budget, my TSL system is a good way to take that first bite of the elephant. You simply live by the following allocation of your gross income.
Taxes (30 percent) — Incredibly, you need to set aside almost one-third of your gross income to cover federal and state income taxes and the various other government levies we pay, including property taxes.
Savings (20 percent) — This is the minimum you should be saving for retirement and other long-term goals, such as buying a house. Ideally, much of this money will be in your employer-sponsored 401(k), where it will grow tax-free until you retire and receive a matching contribution from your boss.
Not sure how much you need to be saving for that dream retirement? There's a tool for that. My retirement calculator, which you can find on WesMoss.com, factors in your current financial situation and retirement goals to give you a sense of what you should be putting aside every month to fund your post-career life.
Life (50 percent) — So, you are left with one-half your gross income to pay for everything you need and want in life, from food and shelter to car repairs to Starbucks. How you spend this bucket of bucks is, obviously, up to you.
That brings us to my second pound-wise strategy.
Don’t overspend on houses and cars.
A mortgage payment consists of principal and interest (P&I). Real estate companies and lenders typically say you can spend up to 28 percent of your gross household income on your P&I. I think that’s too much, and recommend that you try to stay closer to 20 percent of your gross. That means if you and your spouse make a combined $100,000, you should limit yourselves to $20,000 of annual P&I, or $1,666 per month.
If you commit 28 percent of your gross to P&I on that same income, you’re paying $2,333 per month. That’s a difference of $667 per month that could be going to other things like savings, consumer debt reduction, or being a bit penny-generous around the holidays.
So ask yourself how much house you really need, and whether you really have to live in that tony neighborhood. The money you save on your house payment could be spent on items or activities more rewarding than an extra quarter-acre or swank address.
Same thing with cars. There’s nothing more seductive than a new car. The sleek lines! The shining paint! That new-car smell! But my favorite kind of car is a paid-off car.
Try to buy only as much car as you can pay for with cash. If that’s not possible, buy slightly used. (I love Carmax.) Again, not having a $250 monthly car payment creates more money for saving — or holiday trimmings.
If you are living your financial life by these guidelines, you can buy as many Starbucks lattes as you like without feeling guilty. And this holiday season, you can splurge — a little. Spring for that Honey Baked Ham. Slide a few extra presents under the tree.
You deserve it. You’ve earned a place on Santa Wes’ “nice work” list.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
DISCLOSURE
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