Image: – – Macho Spouse
Whatever your Winter Holiday tradition, now is the time when many cultures have historically livened up the dark days of winter (in the Northern Hemisphere) with celebrations of community, charity, and gift-giving*. Going into debt, however, should not be a part of your tradition.
How much should you spend on Christmas?
I'm big on using percentages when budgeting. Except for the really, really poor or really, really rich, it makes sense to me that if Martha gets paid 50% more than George, then Martha can spend 50% more than George. That generally goes for housing, cars, or Christmas presents. In other words, don't try to “keep up with the Joneses,” especially if you get paid less than the Joneses. That's the idea behind the 60% Budget: keep regular, monthly expenses down to 60% of your gross income, so you can save 10% each towards retirement, long-term savings, and short-term savings; the last 10% is 'fun money' for Starbucks, beer, wine, pizza, McDonald's, toys, etc. Ideally throughout the year you've saved up enough in your short-term savings to pay for Christmas, even after you've paid for oil changes, shoes for the kids, and a trip to the beach over the summer.
Navy Federal Credit Union has a special type of account to help you save for next year's Christmas. It's called the Custom Club® Account. You can start the account with as little as $5, contribute as much as you'd like, whenever you like, and it earns about 3 times the interest of a regular savings account (.75% vs. .25%). It's like a certificate of deposit in that you can't withdraw the money until the maturity date, but the good news is: you pick the maturity date -- Black Friday, perhaps? But what if you've made it to this point in the year without anything saved? Should you charge it? Go (deeper) into debt? Borrow from your retirement fund?
Best case: skip the Starbucks, the Pizza Hut, the package store** and all your other 'fun money' spending this month and use that to pay for gifts. An E-5 over 4 years gets about $4,000 in gross pay per month. Spending 10%, or $400, would be the max limit I think, even a little high unless you lived like a monk for a whole month.
You could skip contributing to your retirement account, such as the Thrift Savings Plan (TSP), for a month, but it might prove costly. Forty years from now, the $400 you didn't save in the TSP could be worth $9,000 due to the power of compounding.*** Borrowing from your TSP account is almost never a good idea, again because of the lost period of compound growth.
Going deeper into debt by adding to the carried balance on your credit card is another bad idea. With few exceptions, the unsecured debt of a credit card costs you 15%-25% or more. Using a credit card is not intrinsically bad however. Ideally you'd only use your credit card to buy things you've already saved for. Then you can pay off the credit card when you get the bill. Credit cards often give you purchase protection and fraud protection not available when you use a debit card; that's why in most cases I recommend using a credit card when making an online purchase.
There are some good credit card deals out there available only to service members. For example, USAA will reduce your credit card interest rate to 4% for a year if you are deployed or when you PCS. Pentagon Federal Credit Union (PenFed) offers the Defender American Express only to service members and veterans; it has an introductory APR of 6.99% for 5 years (!), and a balance transfer rate of 4.99% (!!).
If things are really bad for you financially, consider asking for some help. Kate Kashman has concise post about charitable organizations that want to help families during the holidays. Many of you probably know that the Marine Corps Reserve participates in Toys for Tots every year. They assist families in need (civilian or military) with food, clothes, and toys for the holidays. If you're having trouble paying for basic living expenses such as rent, food, gas, or clothing, visit the Navy-Marine Corps Relief Society****, Army Emergency Relief, Air Force Aid Society, or Coast Guard Mutual Assistance. They are all charitable, non-profit organizations that operate on donations, primarily from service members themselves.
Finally, watch out for the long pay period this month. As Kate points out, the official, regular pay-days this month are 13 December and 31 December. That's 18 days from paycheck to paycheck; plan for it so you don't come up short.
*Christmas is obviously the predominant religious and secular winter holiday in America. I do not endorse the tyranny of the majority, but in the interest of brevity I'm not going to type out every wintertime cultural/religious celebration throughout this piece. You can air your grievances about me at your own Festivus celebration.
**that's the Class VI for you Army and Air Force types
***40 year's growth at 8.1%, or 10% growth with 1.8% inflation
****I regularly volunteer as a caseworker at NMCRS
About the Author: Rob Aeschbach is a male military spouse who spent 12 years as an active duty Marine before becoming a Navy spouse. Since then he has been a stay-at-home-dad for more than 10 years, served in the Marine Corps Reserve until retirement, and started a personal finance blog. You can find him at MilitaryFinancialPlanner.com