How Should I Fund My Holiday Expenses?

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Q: I’ve listed all my anticipated expenses for the holiday season and I’m ready to burrow under my covers and wake up on Jan. 2. There’s so much to buy and so little money to do it with! How can I pay for my holiday expenses?

A: Yes, ‘tis the season to shop until you drop and your budget goes pop! But it doesn’t have to be this way. With proper planning and responsible spending, you can celebrate the holidays and welcome the new year with your budget intact. Here are four ways you can pay for your holiday expenses and the pros and cons of each choice.

1. Credit cards

For some, credit cards can be a gateway to overspending. They open up so many doors, and there’s no need to worry about the cost — until the bill shows up!

Pros:

Convenient. Accepted at most retailers, credit cards negate the need to carry cash around and provide a means for putting off actually paying at the time of purchase.
Rewards and cashback. Many credit cards offer rewards points, miles or cash back, which can be beneficial if you can pay off the balance in full.
Purchase protection. Most credit cards offer protection on large purchases so you can reverse a charge if a product turns out to be different than promised. Some credit cards also offer extended warranties, price matching and coverage for lost or damaged purchases.

Cons:

High interest rates. If you don’t pay off your balance each month, interest charges can pile up quickly, making your holiday spending far more expensive than anticipated.
Overspending. The ease of swiping a card makes it easy to overspend, especially during the holidays.
Debt accumulation. If you carry a balance into the new year, you might be stuck with lingering debt that could take months, or even years, to pay off.

2. Holiday club accounts

Holiday club accounts are savings accounts specifically designed for holiday spending. You contribute money throughout the year, and at the end of the year, the funds are released for holiday shopping.

Pros:

Encourages saving. Holiday clubs help you save gradually over the year, ensuring you have a set amount of money ready for holiday expenses.
No debt. Using money you’ve saved helps you avoid going into debt from holiday expenses.
Set it and forget it. You can set up your holiday club to take automatic monthly contributions from your other accounts or payroll deposits so your holiday savings happen every month no matter what.

Cons:

Limited access. The funds are usually only accessible at the end of the year, which can be problematic if you don’t have other liquid savings to cover you in case of an emergency. if you need the money for something else, it’s not available.

3. Unsecured/personal loan

Unsecured loans typically come with a fixed interest rate and payment term, making it easier to plan your repayment schedule.

Pros:

Fixed payments. Unsecured loans offer predictable monthly payments, which can make budgeting easier.
Low interest rates. Unsecured loans tend to have lower interest rates than credit cards.
No collateral needed. Most personal loans are unsecured, which means you don’t need to risk your home or car.

Cons:

Increased debt. Taking out a personal loan adds to your overall debt load.
Interest costs. While rates are lower than credit cards, you’ll still be paying interest on the money you borrow.
Eligibility requirements. You’ll likely need good credit to qualify for the best rates; some people may not qualify at all.
Temptation to overspend. Borrowing a large lump sum can tempt you to spend more than you originally planned.

4. Home Equity Loan (HEL) or Line of Credit (HELOC)

If you’ve built up equity in your home, a home equity loan or HELOC can be a fabulous way for you to get a large amount of funds at a low interest rate.

Pros:

Lower interest rates. Since these loans are secured by your home, they typically come with lower interest rates than unsecured debt, like credit cards or unsecured personal loans.
Large borrowing capacity. Depending on how much equity you have in your home, you can potentially borrow a significant amount of money.
Flexible terms. A HELOC allows you to borrow what you need, when you need it, which can be useful if your holiday expenses vary over time.

Cons:

Risk of losing your home. You risk losing the home if you default on the loan.
Fees and closing costs. HELOCs and HELs may have application fees, appraisal costs and closing costs.
Long-term debt. Using home equity to fund short-term holiday expenses could result in carrying debt for years.

There are several ways to pay for your holiday expenses, and each option has its own benefits and disadvantages. Use our guide to choose the option that best suits your purposes.