The holidays are an unquestionably expensive time of the year. From gift-giving to hosting to traveling, the costs associated with celebrating with family and loved ones can quickly add up. As such, many folks have no choice but to get creative when it comes to scrounging up spending cash. For some, that means cutting back drastically on expenses. For others, it means getting a second job.
But according to a new GOBankingRates survey, nearly 27% of Americans plan to pay for the holidays this year by dipping into their savings, both near-term and retirement. And that's a mistake that could result in some very serious repercussions.
Don't tap emergency or retirement savings
If you have a general savings account outside your emergency fund -- say, an account you use to pay for things like vacations and larger purchases -- then there's certainly nothing wrong with accessing that account to help cover your holiday spending. But if you're thinking of raiding your emergency or retirement savings to pay for the holidays, don't.
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If you tap your emergency cash reserves for a non-emergency, you'll risk not having enough money in the bank when a truly dire situation does arise. And then, you may have no choice but to rack up credit card debt, or risk other unfavorable consequences, when faced with an expense you can't put off, like a car or home repair.
Tapping your retirement fund to pay for the holidays is a dreadfully bad idea as well. For one thing, the more money you remove from your IRA or 401(k) plan, the less money you'll have available during your golden years, when you really need it. (Remember, you may not be able to work during retirement, which limits you to more of a fixed income.) And if you think a single retirement plan withdrawal won't make a huge difference over time, consider this: If your retirement plan investments normally generate an average annual 7% return, and you remove $800 this year to pay for the holidays, in 30 years from now, you'll have $6,000 less in your account than you could've had when you account for growth on that initial $800.
Not only that, but when you remove funds from a retirement plan prior to turning 59 1/2, you risk a 10% early withdrawal penalty on the sum you take as a distribution. An $800 withdrawal, therefore, means you forfeit $80 off the bat.
A better bet for paying for the holidays? Curb your spending as much as possible, boost your income with extra shifts at work or a temporary seasonal job, or sell belongings you don't need to drum up additional cash. None of these moves will hurt you financially in the long run. Quite the contrary -- they're a smart way to tackle an expensive period of the year.
At the same time, pledge to start saving for next year's holiday season well in advance. That way, you won't find yourself contemplating an emergency fund or retirement plan withdrawal again.
