Consumers appear determined to minimize financial strain this holiday season. The biggest retailer weekend of the year just passed with the average shopper spending an estimated $407, down 3.9% from last year. Such frugality and, dare I say it—common sense—are rarely evident in December. Some experts believe a spending binge will yet develop as the season advances. With that in mind, now may be the perfect time to consider your bigger financial goals—before you give in to the excessive Santa impulse. Here are some ideas for making an extra few hundred dollars work for you in the long run, not against you in the next billing cycle:
- Boost retirement savings Rather than bust your budget on gifts why not add to your 401(k) plan or IRA? Most people won’t be able to contribute the 401(k) max: $17,500 (plus another $5,500 if over the age of 50). But even a few hundred dollars that compounds over many years is significant, especially if it comes with a company match. Boosting pre-tax contributions before year end will also cut your 2013 tax bill.
- Start an emergency fund Putting away as little as $500—about what you’d spend on a new game console or other electronic toy—can make a big difference. Ultimately, you want six months worth of fixed expenses in a secure account to be tapped only for emergencies. But you have to start somewhere, and while a few hundred dollars won’t help a lot if you lose your job it will more than cover something like a major appliance breakdown without disturbing your longer term financial plans.
- Put your raise to work for your future Workers who get information about annual bonuses or pay raises at this time of year may be especially tempted to splurge on extra gifts. But using that incremental pay to boost your 401(k) savings by even a small amount can be worth many thousands of dollars 10, 20 or 30 years from now—after compound growth has worked its magic. Make the commitment before you head to the mall instead.
- Reinvest and rebalance The average stock has risen nearly 30% this year. If you have money in a taxable account you may be tempted to take some profits and spend. Resist. After all, much of this gain is making up for lost ground during the financial crisis. Hunt for individual stocks where you have an unrealized loss and sell them now to offset taxes owed on stocks sold at a profit this year. In a tax-deferred account, consider selling shares to reallocate proceeds to bonds and other assets that did not rise so fast. “You need to make sure you’ve still got the right mix to provide the desired balance of growth, return, and risk tolerance,” says Charles Schwab.
- Give to charity Many charities conduct their annual fund raising efforts this time of year for good reason. People tend to be in a more giving mood and, if you itemize on your tax return, giving now offers a last chance to reduce taxable income by the amount of the charitable gift. But even if you don’t reap any tax rewards, giving a few hundred dollars to a charity near your heart will make you feel good a lot longer than spending on more toys likely to be long forgotten by January.