Stores put out Christmas merchandise extra early hoping you’ll start spending early and continue spending right until the end of the holiday season.

I’m talking about Christmas because I’m hoping you’ll start saving early and continue saving until you start your Christmas shopping.

The holiday season is a happy time for many. But, too many people are faced with depressing credit card bills once the new year rolls around. Too many people are still paying on last year’s Christmas debt and it’s September (in a couple of days). That’s not the type of situation you want.

What you want is to have a special savings account that’s dedicated entirely to Christmas shopping. Ideally, that savings account has all the money you need to buy your gifts, decorations, food, travel, and whatever else you spend on during the holidays.

If you want to have that dream account, you have to start working on it now. Figure out how much you can afford to save each paycheck. Then, on your next payday, go open your holiday savings account. Continue contributing to it each payday until you stop shopping for the holidays. Put your credit cards away and don’t even think about using them. And in case you were wondering, holiday gift shopping is not an excuse to dip into your emergency fund.

By all means you should enjoy your raise, but spending it on consumable goods, isn’t the wisest thing.  If you’re already living comfortably, it’s actually stupid to just spend the money.  You’ll unnecessarily inflate your standard of living making it nearly impossible to realize you’ve gotten a raise.

Dumb things to do with a raise

• Buy a new car, especially a larger, gas-guzzling one
• Go on an extra vacation
• Buy more expensive clothes
• Hide it under your mattress
• Spend it before it shows up in your paycheck

Smart things to do with a raise

Pay Off Debt

When you get extra money, put it toward your debt, especially high interest credit cards and loans.  Stretching out your payments means you pay more interest to the banks than you would if you’d paid the debt sooner.  Paying off debt sooner rather than later saves you money in the long run.

Invest and Save

It only makes sense to put your money toward something that will make more money, rather than something that will only cost more money.  Put your raise in a high-yield investment or savings account.  Let’s say your raise gives you an extra $250 a month and you put it into an investment that gives you 7% a year.  After 5 years, you’d have $21,477.  If you spent that money, after 5 years, you’d have $0.

This weekend my car battery died.  Since my car was parked in the garage, I needed one of those battery pack things that tow trucks carry.  It was Sunday and most towing companies were closed.  The ones that were closet to me and open, only took cash and I only had credit and check.  The one I found that took credit was a 30 minutes away from me.  It actually took 45 minutes for the truck to come.  I was kicking myself for not having cash on me.

You won’t always be able to make it to the bank in time to finance a emergency.  So, keeping some cash stashed somewhere in your home is a good idea.  You don’t need much.  Just a few hundred dollars kept hidden and locked away in a safe can save you a lot of trouble.

There’s another side to that coin.  The person that saves everything.  Having some extra money in the bank is a good thing, but is it possible to save too much?

Are You Living Debt-Free?

Some level of debt is reasonable.  Most people can’t afford to buy a home upfront, so a mortgage is usually a given.  You probably also have student loans, an auto loan, and possible some credit card debt.  Don’t save so much that you neglect to pay off your debt.  Generally, you should pay off highest interest debt first which usually means credit card debt, then auto loan, followed by student loans, and mortgage.

What Are You Saving For?

Saving is good, but what’s the point of saving for the sake of saving?  When you’re putting money into your savings account each month, you should have a savings goal in mind.  Not only will that goal give you something to work toward, it will also let you know when it’s ok to stop saving.

Enjoy the Money You Make

What’s the point of going to work everyday if you never get to enjoy the fruits of your labor?  It’s okay to spend money on things you like, whether it’s going to see a movie, enjoying a new restaurant, or buying the latest electronic gadgets.  You just have to do it in moderation.

If you’re putting aside money each month for retirement, you’re making payments toward your debt, and you already have an emergency fund, doing a little frivilous spending is acceptable.

To prepare for times like these, every wage-earning person should have an emergency fund.   Consider your emergency fund as your backup plan for losing your job and being unable to collect unemployment.  A good emergency fund will contain at least three to six months of living expenses.  More is always better. 

Putting your emergency fund into an interest bearing savings account is a good idea.  However, it’s not a good idea to put your fund into any kind of account that has early withdrawal penalties.  (This means you shouldn’t think of your retirement savings as an emergency fund).

Credit cards and loans don’t make good emergency funds because that money must be repaid.  Financial trouble has a funny way of compounding and using debt to bridge a job loss will only make matters worse.

Take advantage of being employed and start putting money aside for a rainy day.  Remember, the ideal emergency fund will cover your living costs for at least three months.

A good read: How to prepare for a layoff

1. Do it automatically
2. Give yourself a reward for meeting your goal
3. Punish yourself for not meeting your goal
4. Use a Roth to save and lower your taxes

I especially like #2.  Nothing is more motivating than positive reinforcement.  Be careful that your reward isn’t something that blows your entire savings. Otherwise, what was the point?

Read the full story: “Fool yourself into saving smarter“