This is the time to roast chestnuts over an open fire… to kiss under the mistletoe… and, if you’re like many Americans, to shell out way more money than you can afford on family and friends.
We seem to have decided that this is a perfectly natural thing to do, despite the fact that seasonal overspending strains one’s finances the rest of the year. To me, this is a perfect illustration of our tendency to confuse giving and true generosity. The latter exists only if the act is kind to the recipient and the giver—meaning the gift doesn’t deplete the giver’s resources or harm her financial security.
Using your credit card to buy a present when you won’t be able to pay the bill in full: Where’s the joy in that?
This month I’m asking you to be as good to yourself as you are to those you love. Here are a few guidelines to follow the next time you’re considering a gift, whether it’s a cashmere sweater wrapped under the tree or the assets you would like to leave behind.
• Crunch the numbers. The question isn’t what you want to give. I know you want your loved ones to have it all. The question is what you can afford.
The right amount to give is what you can spend today without compromising your own needs. The bottom line: Under no circumstances should you incur debt you can’t immediately pay off in order to give a gift. That means no credit card balances rolling into January. Sit down and calculate exactly what you can comfortably spend, and be vigilant in sticking to that amount.
• Protect your reserves. Tending to your emergency savings fund and your retirement nest egg are two important acts of generosity. Your long-term financial security is what will enable you to continue extending yourself to those who depend on you, whether you’re giving your money, energy, time or compassion. Under no circumstances should you take money from a retirement account or forgo this month’s contributions to afford holiday gifts.
• Give the greatest gift of all. If you have grown children, you’re probably inclined to help them wherever you can. While it’s important for them to be independent, an excellent gesture of love and support is to assist with their long-term financial goals. And making a contribution to a house down payment fund, for example, is a great way to reduce the size of your taxable estate.
By transferring some of your assets while you’re alive, you lower your exposure to the federal estate tax. In 2014 you and your spouse can each give $14,000 per child without incurring a gift tax liability.
Pass the eggnog. That’s an idea worth toasting!