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Saving for the Holidays: Are Investments the Answer?

The holidays can be a wonderful time of year. A time for relaxation, celebration and togetherness with loved ones. Unfortunately, all the traveling, gift-giving and feasting isn’t cheap.

On average, Canadians planned to spend $1,517 each during last year’s holiday season, according to BMO Financial Group.

All these purchases (travelling, entertaining, and gifts) obviously have to be paid for. As it stands, many Canadians don’t save enough for the holidays. According to a 2013 study by TransUnion, 65% of consumers seem to rely on credit cards for at least part of their holiday shopping. Think of it as the buy now, pay later approach to spending. Of course, the bill always comes, which means once the holidays are over, the debt hangover arrives.

So what’s a person to do? How should Canadians prepare financially for the holidays?

The most straightforward answer is to start putting aside money, when possible, long before the holiday season. For example, saving $150 per month starting in January would more than cover the average Canadian’s holiday expenses. At this rate, just before November – when holiday spending really starts kicking into gear – you would’ve saved $1,500. This is just $17 shy of what the average Canadian planned to spend during the holidays last year, thus putting them in great financial shape.

How to find that extra $150 per month? One idea is to focus on spending throughout the year that you can live without. For example, perhaps you spend $70 a month on a gym membership you rarely use. Or maybe you’re dining out multiple times a week and can cut back somewhat, choosing to eat at home more often. Scrutinizing your spending habits (and creating a budget) can help you cut unnecessary outlays and put you in better financial shape for the holidays.

For many Canadians, saving an extra $150 per month simply isn’t possible given their current situation. One approach if you find yourself in this boat is to examine your planned holiday spending. Just because the average person spends more than $1,500 on the holidays doesn’t mean you have to, or that your holidays will be worse off if you spend significantly less. Travelling less, making gifts instead of buying them, and making meals at home instead of eating out are all ways to bring your holiday spending in line with your financial means.

Your frugality will literally pay off when you don’t get a huge credit card bill in January. It also means you won’t potentially rack up huge interest charges because you’re unable to immediately pay off your credit card’s balance in full.

Investing for the Holidays?

When we talk about investing, we usually have retirement or a big future purchase (such as a car) in mind. But is there an effective way that Canadians with savings can maximize their money in advance of the holiday season?

Before answering that question, it’s worthwhile repeating a well-known adage: you should match the type of investment with the length of the goal. In other words, if you have a long-term goal in mind, your investments should reflect that. This sort of thinking tends to favour riskier investments such as stocks that can fluctuate wildly in the short term but tend, over the long term, to do better than more conservative investments.

The flipside to this, mind you, is that short-term investments are most appropriate for short-term goals. Investing for the holidays fits into this category. If you’re putting aside money for holidays less than a year away, your first priority needs to be capital preservation (i.e. don’t lose anything). Any interest you make is gravy.

So what fits the bill for holiday saving? Equities are out, but investments such as short-term GICs and high-interest savings accounts are definitely appropriate. For instance, if you already have $1,500 socked away, and you invest this in a GIC paying 1.50% interest, you’ll have an extra $22.50 over the course of a year. That may not seem like much, but it will put you further ahead than if you had just kept your money in a traditional savings account. Be sure to check out Canada’s best GIC rates to maximize the interest you’re earning.

The holidays can be a joyous time. And with some savvy financial planning, smart spending and wise investing you won’t have a massive bill to go along with all the fun you had.

Flickr: Lynne Graves