Personal Finance

Are You Sabotaging Your Retirement with Holiday Debt? Here’s the Real Cost

Rich Duprey

Published: December 19, 2024 3:06 pm

The holiday season is upon us, but behind all the joy and festivities, lurks a hidden cost that can undermine your financial stability and ruin your long-term retirement goals: holiday debt.

In our rush to give gifts, host lavish parties, or take memorable trips, the result can be financially devastating when these expenses are funded by credit rather than savings. 

Because it is a temptation too great for many to bypass, let’s take a look at just how holiday debt can affect your retirement and explore some strategies to navigate the festive season without needlessly jeopardizing your future.

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The true cost of holiday debt

One of the more pernicious outcomes from financing your holidays is interest accumulation. When you purchase items on credit, you’re not just paying the price of the item. You’re also paying interest over time. 

A $1,000 purchase on a credit card with an 18% annual interest rate will have you paying significantly more for a gift if you only make minimum payments. It will take more than nine years to pay off the balance and the total cost will come in around $1,800 due to compound interest.

While Albert Einstein is often remembered for remarking that compound interest is “the eighth wonder of the world,” less well known is the rest of the quote where he said “Those who understand it, earn it, and those who don’t, pay it.” You want to be among the former, not the latter. 

The second pitfall of buying on credit is the opportunity cost of the purchase. That is the money you spend on interest or debt repayment that could have been invested for your retirement and earned you substantial returns over time.

If the $800 in interest you paid to the credit card company was instead invested in a retirement account with an average annual return of 7% (or the historical rate of return of the S&P 500 index minus inflation) compounded annually for 20 years, it would grow to approximately $2,981. 

It might not seem like much, but by not investing this money, you’re losing out on nearly $3,000 that could have been part of your retirement fund. Now multiply that by every holiday you purchase gifts or other items and over time it adds up. As Vice President Everett Dirksen is alleged to have said about government spending, “A million here, a million there, and pretty soon you’re talking real money.”

The long-term impact on retirement

The accumulation of holiday debt year after year can significantly hamper your retirement savings efforts. By delaying savings for retirement because you are transferring money instead toward credit cards, you waste the potential for earnings growth that could lead to a comfortable lifestyle in your Golden Years.

That is a result of losing out on the magic of that eighth world wonder, compound interest. Delaying investments due to debt repayment means less growth over time. It also increases your financial stress. Debt can lead you to make unsound financial decisions, further impacting your retirement planning.

Consider two individuals, each of whom has $2,000 a month to put away for retirement. The first person, though, has to pay $800 a month in credit card interest, giving him only $1,200 to save, while the second person is debt-free. Both will earn 7% in interest each year over 20 years.

The one with credit card debt will save over $290,000, a nice little nest egg, but the person who is debt-free will save more than $483,000 over those two-and-a-half decades.

Buying on credit will cause you to save 40% less than by not having debt.

Strategies to avoid holiday debt

You don’t need to use credit cards to have a nice holiday and share in the spirit of the season. There are a number of strategies you can use to avoid debt and secure your financial future.

Plan ahead. Start saving specifically for next year’s holiday as soon as the current one ends. Putting aside a small amount every month can accumulate into significant funds by the time December rolls around.

Use cash. Cash transactions force you to live within your means. If you can’t pay cash for something, it’s a signal to reconsider the purchase. We should all be living below our means and using cash, unencumbered by credit cards, will ensure you don’t spend more than you can afford.

Set spending limits. Agree on a budget for gifts, decorations, and outings, and share them with family and friends to help manage their expectations.

DIY the holidays. Homemade gifts or experiences can be more meaningful than expensive store-bought items and significantly reduce your costs.

Shop smart. Look for sales, use coupons, and shop early during off-peak times to avoid last-minute, high-pressure buying. Wait for Black Friday sales or special shopping days. The biggest retailers including Walmart (NYSE:WMT), Target (NYSE:TGT), and Best Buy (NYSE:BBY) have their own form of Amazon (NASDAQ:AMZN) Prime Days, especially around the holidays.

Develop a credit card strategy. If you absolutely must use credit, choose cards with rewards or 0% introductory APR offers, but only if you can pay off the balance before the promotional period ends.

Seek out expert advice. Financial advisors can provide helpful tips on reining in your expenses and reducing them faster so you can supercharge your retirement savings.

Key takeaways

The long-term benefits of having financial discipline can result in peace of mind, financial security, and forming good financial habits. By having discipline, you can lower your stress and enjoy the holiday more without worrying about debt. 

It’s not that you’re just saving for today, but rather you are investing in your future and ensuring a more comfortable retirement. Having good financial habits during the holidays can also spill over into the rest of your life as they foster a healthy respect for saving and investing rather than spending.