Why You Need a Holiday Fund & How to Build One

Did you know the average American spends just under $1,000 on Christmas, according to research by the National Retail Federation? While Christmas is typically the holiday people spend the most on, other holidays and celebrations throughout the year can also sneak up on us. 

With expenses for birthdays, anniversaries, Valentine’s Day, graduations, weddings, and other things you might celebrate, your holiday spending can add up fast. If you haven’t set aside money to help cover the costs, this spending can put a dent in your budget. It can even cause you to dip into your emergency fund or rely on credit. 

A dedicated holiday fund can help you avoid these situations. Let’s look at what a holiday fund is, why you need one, and how you can start one today!

What is a Holiday Fund?

A holiday fund is money you’ve set aside to celebrate holidays and special events. You can use it for gifts, decorations, food, or any other holiday-related expenses. Often, when people think about a holiday fund, they only think of saving money for Christmas, but you can also use your holiday fund to help cover expenses associated with birthdays, anniversaries, graduations, or any other time you’re buying gifts or celebrating.

Why Do You Need a Holiday Fund?

First, having a separate fund and budgeting for holiday expenses helps prevent dipping into emergency savings or using credit. 

You don’t want to use your emergency fund to pay for holiday-related expenses, because they aren’t emergencies. Typically, these are expenses that arise yearly at the same time that you can prepare for. If you use your emergency fund when it isn’t an emergency, you may find yourself facing a true emergency with no buffer. You also don’t want to rely on credit for your holiday expenses because this can lead to high-interest credit card debt. With the added interest, those gifts will cost you much more than you bargained for.

Second, having a holiday fund can help you enjoy the holidays more and stress less. When you’ve budgeted and set aside money for the holidays, you won’t be worried about making rent and buying gifts. This can help you slow down and enjoy the celebrations.

Where Should You Save Your Holiday Fund?

As you prepare to set up your holiday fund, you may be curious about the best place to stash the cash. Removing it from your checking account can be helpful so it doesn’t get claimed by other expenses. 

You could keep it in your regular savings account or move it to a high-yield savings account (HYSA) where it will earn more interest. This ensures that your money is working for you while you save it. 

As a holiday or celebration gets close, you can transfer your budgeted amount to your checking account to cover the bills.

How to Build Your Holiday Fund

Now that you know why you need a holiday fund and where to save it, it’s time to start building yours. 

Decide How Much You’re Going to Spend 

As you create your holiday fund, consider your holiday budget. How much are you willing and able to spend on different event types? 

To determine this, look at what you’ve spent in the past on gifts, decorations, food, clothes, and any other holiday items you’ve purchased. You can find this information on previous bank and credit card statements. Be sure the number you come up with is in line with your values and what you can afford. 

Add up your total spending across all holidays over the course of the year, this will give you your annual holiday spending budget. 

If you aren’t sure how much you’ve spent on holidays in the past, you can determine an amount you are comfortable spending on each holiday type. For example, you could decide to spend up to $50 per person for a birthday and $75 per person for Christmas. Then add up the number of each celebration type you anticipate. This will give you your annual spending limit for holidays.

Figure Out How Much to Save

Now that you’ve determined your annual holiday spending budget, it’s time to figure out how much to save. If you get paid monthly, divide your annual holiday budget by 12. If you get paid more frequently, figure out how many pay periods you have a year and divide your annual holiday budget by the number of pay periods you have annually. This will give you how much to save each pay period. Create an automated transfer to your savings account for that amount so you won’t have to think about moving that money around every time!

Review Your Monthly Budget

It’s important to know how much to save to cover the cost of holiday spending, and it’s even more important to be sure you can fit the savings into your budget. 

Once you have your per-pay-period target, take a minute to review your budget. Can you fit that savings in? If not, are there expenses you can reduce or eliminate to reach your holiday savings goal? 

If you don’t have any wiggle room to reach the full amount you calculated for holiday savings, you’ll want to adjust your holiday spending plan. Look carefully at your planned spending and reduce it to a manageable amount. 

Start Early

It’s tempting to think that you can save for the holidays the month or two before. The problem with this is that often we underestimate how much we will need or overestimate how much we can save in a short time. So, once you’ve put your holiday spending plan in place, start saving early! 

Even if you can’t get it fully funded before you need to use it, having some money stockpiled for your holiday spending can help protect your budget. The more you save, the less you’ll have to dip into your emergency fund or rely on credit.

Life gets busy and expenses can creep up on you. While you can’t plan for everything, starting a dedicated holiday fund can help you set money aside for your holiday spending. This can help you keep your monthly budget on track and enjoy the holidays without financial stress. Remember to find a safe place to stash your money, figure out how much you need, and start early!