When I begin working with a new client right before the holidays, I always tell them that they are starting their journey to financial clarity at the most difficult time of the year. And that’s good because the rest of the year will seem like a breeze after December.
Year-End Financial Hurdles
December tends to be tough on all of our budgets. Many of us observe a holiday that involves some amount of gift-giving. We travel to see family. We host or attend holiday parties. We give charitably at this time of year. All of these pieces add up to make December the most expensive month of the year for many of us.
The Solution: A Mini-budget
But, it doesn’t have to be financially distressing. Now that you’re on this side of December, you can begin to plan for next December with a mini-budget. In this blog, we’re going to revisit the concept of a mini-budget. You can use this process to ensure that the holidays don’t disrupt your year-long financial progress.
A mini-budget is a budget you create for a specific purpose. When you create a mini-budget, you determine the total amount you plan to spend for that specific purpose, and you steadily save for it over time. We’ll use the holidays to illustrate how to create a mini-budget.
Steps to Creating a Mini-Budget
Follow these steps to create a mini-budget:
1. Make a list of the categories of spending you engage in during the holiday season. Following are some common categories, but only include the categories you plan to spend in.
Holiday gifts
Charitable Giving
Travel
Hosting a holiday party
2. For each category, break down the specific people you’ll buy for or the items you’re planning for. I’ll simplify the above list and assume that we’re only planning on purchasing holiday gifts and traveling to see family. The breakdown might look like this:
Holiday gifts (list of people to purchase presents for):
- Daughter
- Son
- Spouse
- Mom
- Dad
- Brother
- Daughter’s teacher
Travel (to see parents during the holidays)
- Airline tickets (2 adults and 2 children)
- Hotel (4 nights)
- Boarding for family dog
- Rental vehicle (4 days)
3. For each item, list an anticipated cost:
- Holiday gifts (list of people to purchase presents for)
| Daughter | $250 |
| Son | $250 |
| Spouse | $150 |
| Mom | $150 |
| Dad | $150 |
| Brother | $150 |
| Daughter’s teacher | $50 |
| Total | $1,150 |
2. Travel (to see parents during the holidays)
| Airline ticket (2 adults and 2 children) | $1,200 |
| Hotel (4 nights) | $600 |
| Boarding for family dog | $200 |
| Rental vehicle (4 days) | $300 |
| Total | $2,300 |
4. Divide the total needed by the number of months or pay periods you have between now and the expected need. In this case, we have 12 months to save until the holidays:
$1,150 + $2,300 = $3,450
$3,450/12 months = $288/month
5. Now establish a savings plan by working that savings amount into your overall monthly budget. Each month, or each payperiod, set aside the amount you calculated into a special savings account for this purpose. If you save $288 per month, you’ll have the amount you need for this expense by next holiday season.
The Power of a Mini-Budget
Using this process can be powerful for several reasons.
You avoid paying interest on your purchases
Because a mini-budget forces you to plan, it puts you in a position of being able to pay for an expense with cash on hand. In this way, you’re playing offense rather than defense. You avoid putting these expenses on a credit card and paying high interest charges trying to pay it off later.
You avoid impulse purchasing
Because you’ve thought ahead, when the situation of an impulse purchase arises, you’ll compare it to the amount you’ve already planned for and most likely opt not to make the impulse purchase. If you do decide to make that purchase, then you can create a tradeoff in a different area. Want to spend more on Christmas gifts? Perhaps you make up for the cost by driving, rather than flying, to see family that holiday season.
You make expenditures that fit into your overall budget
Holiday spending can reverse much of a year’s worth of positive financial progress. By creating a plan to use current cash flow you are avoiding dipping into funds that would go towards retirement planning or other established long-term goals. It’s often the short-term decisions that derail progress toward long-term goals.
You learn to space out goals
It can be very tempting to impulsively spend for the holidays and then turn around and take a lavish vacation. If you create mini-budgets and fit them into your overall budget, then you space out each of these goals, steadily reaching one milestone at a time.
Use Mini-Budgets Broadly
This is one example of a large annual expense that you can create a mini-budget for. But, you can create a mini-budget for other items as well. Mini-budgets are a very effective tool when planning for annual vacations or large special events such as birthday parties. You can even use these when planning for those big, very occasional events such as a home purchase.
Start by picking one item to create a mini-budget for, and let us know on our social media how the process is working for you. We’d love to hear how it goes!