How to Eliminate Christmas Debt For-ev-er

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christmas gift sinking fund

The Christmas sinking fund is a new name (well, new to me) for an old savings method that I adopted. Before about a few weeks ago, I used to just call this my Christmas savings account.  I used this method so I could be as generous as I wanted without any of the stress that traditionally accompanies this generosity.

I truly enjoy nothing more than searching for the perfect gift for my family and then watching their faces light up when they finally open their Christmas gifts. Like most people, I then had a mini heart attack after the magic of Christmas was over and it was time to tally up how much I spent. More importantly, how much I owed the credit card companies.

I’m not really sure why we act like Christmas is this big surprise that comes every year that we can’t plan for accordingly. I see this all over; my friends and family all wondering how they are going to fund their Christmas expenses.  When I finally started to think about this gift-giving just like any other expense, I had a wake-up call. I was able to start planning for it in a much smarter way. And so my Christmas “sinking” fund was born!

What’s a sinking fund?

Let’s first start with the obvious, what is a sinking fund? The dictionary defines a sinking fund as “a fund formed by periodically setting aside money for the gradual repayment of a debt. So, translating that into your Christmas debt problem is simple, start putting away some money each paycheck all year and when it’s time to go Christmas shopping, you already have what you need ready to go. You have now eliminated the internal struggle on whether to be generous or to avoid debt.

I know we are talking about Christmas right now but just to be clear, this strategy will work for absolutely anything that has a known price/date. Some of the usual suspects: vacations, home improvements or a large purchase. These all make for great sinking funds.

There is definitely some comparison drawn between the sinking fund and the emergency fund. A very important distinction is the fact that a sinking fund is planned to be used up for a specific expense at a specific time. An emergency fund is for the truly unforeseen events.

How to get started?

First things first, you need to get a firm grasp on a few crucial details to be set for success.

  1. How many people do you plan on buying a gift for (be sure to include gifts purchased for donations as well)?
  2. How much do you plan on spending on each of them?
  3. How many paychecks do you have between now and when you will need to start shopping?
  4. How much extra do you have from each paycheck after monthly expenses?

Assuming you have the above 4 items figured out, we will run through a quick example of how this works.

If you want to buy for 15 people and spend different amounts on each but totaling up to $2,250 (average of $150 each person). Your paychecks are coming bi-weekly for this example so if you split the hefty $2,250 price tag across 26 paychecks (1 check every 2 weeks for 52 weeks) then you see that you need to stash away $87 per check in order to hit your number 1 year later. Simple!

Although, I would round up to a $100 per check to give myself a few hundred dollars extra in case I missed anyone or wanted to buy/donate for those less fortunate. Anything leftover can just roll right into the following years’ fund. Overall, I find that I am always missing something, a random grab bag here or a potluck there. It’s always great to have a little wiggle room.

By splitting the amount up over the year into bite-size pieces you have lessened the blow of the $2,250 expense. I don’t know about you but $2,250 in addition to my monthly expenses would absolutely lead to added on debt. Of course, your Christmas budget may not be this high or it could be higher like ours. Both my wife and I have large families so December is a pricey month and requires proper planning.

Where to stash the money and how?

Believe it or not, this is more important than you might think. I know it certainly was for me, at least. If you have a pile of cash laying around it will inevitably start getting tapped into here and there. This is out of pure convenience (or laziness) and could seriously compromise the intended purpose of your sinking fund. A little here and there can definitely add up.

Where should this fund live? There are plenty of options where you can keep the money “safe”. Safe from the inevitable depletion if stored under your mattress and it can grow too! The specific savings vehicle is less important as long as the money is in a secure location and not touched. Instead, I’ll just share a relatively easy way and what I do. I search for an online savings account with a competitive interest rate, it won’t earn much but something is better than nothing. Next, I start an automated direct deposit into the new savings account each check for the specified amount.

Note: We chose the American Express savings account which at the time of this post earns 2.1% APY. Be sure to look at the rates before you make any decisions, they change frequently.

Remember…automate, automate, automate. If the money never hits your everyday checking account it is like it never existed. Taking away your sinking fund’s visibility makes it so much easier to save. Removing the manual process of transferring money into a savings account is like the oldest trick in the book. For that reason alone the automated direct deposit is a crucial part of this strategy.

The versatility of the sinking fund.

Now as I mentioned above the sinking fund can really be used for any large purchase and when you really break it down is extremely simple. When we were planning our wedding we had a sinking fund. When we were looking to buy a house we had a down payment sinking fund. Now that we are planning some home improvements we have another sinking fund. A sinking fund is just a way to organize your future expenses and start saving for them rather than waiting until the day the bill is due.


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