Opinion: Why Christmas On Credit Will Damage Your Child’s Future Happiness

At this time of year, there’s a huge amount of pressure on parents to go overboard on their Christmas spending so that they give their child a day that they’ll remember for the rest of their lives. The only problem with this is that few parents actually have the money to spare to provide the type of Christmas that western society dictates as a good Christmas. The temptation then, is to accept one of the numerous and easy-to-obtain offers of credit, be it a bank loan or a credit card, with the thought that it can always be paid off later, just to ensure your child has a happy Christmas.

Christmas On Credit Graph 1

The total amount of money that you’ll have to pay to the bank in interest if you borrow money for every Christmas before your child turns eighteen at four different interest rates: 10% (top line). 20%, 30% and 50% (bottom line)

However, using credit to fund Christmas is not only financially risky, it also means that in the long run, you’ll have substantially less money to spend on your kids. When you think of this as one Christmas at a time, the figures don’t seem too bad. Say, for example, you’re planning on spending £500 on Christmas, and rather than saving up, you borrow this amount or, worse, put it on your credit card. Then, over the next year, you’ll probably have to pay back somewhere between £50 (if the interest on your loan is only 10%) and £250 (if it’s a more eye-watering, but by no means extreme, 50%). When you think about it, that’s all money that is now going to the bank rather than being available for you to spend on your child, but maybe you think it’s still not that much to pay for the perfect day.

Well, I’d argue that it is, especially when you think about it not as a single Christmas, but when you add up total amount of money you’ll be paying to the bank rather than spending on your children over the eighteen Christmases they’ll spend with you before they legally become an adult themselves. Over these eighteen years, if you borrow money for each Christmas, and allowing for a two percent increase in your spending each year, then, you’ll have paid the bank between £1,071 (at 10% interest) and  £5,353  (at 50% interest) in interest alone. This, of course, is assuming that you’ll have paid off each year’s debt before the next Christmas rolls around. If you only manage to pay 90% of it off, then the money gobbling effects of compound interest start to come into play, and on a loan with 30% interest (which is quite typical for a credit card), you’ll end up paying not the £3,212  in interest if you paid it all off each year, but an eye-watering £8,362. Now considering that the total Christmas spend over this time is only £10,706, this means that effectively, you’re paying almost twice as much as you think you are for each and every Christmas. I’m sure you’d balk at the idea of paying twice as much as the price tags says for every present you buy at the time of purchase, but when you buy things on credit, this is exactly what you’re doing, you just don’t notice it because it’s a more subtle cumulative effect over a much longer period of time.

Christmas On Credit Graph 2

The difference in interest payments over eighteen years between saving up for Christmas (green) and borrowing money for Christmas, especially if you fail to pay back the borrowed money in full by the following Christmas (dark red).

At this point you may well be thinking, that’s all very interesting, but they’re just random figures, aren’t they? I mean, why is any of this damaging to my kids future happiness? Well, there’s three reasons here. The first is that all this money you’re paying in interest could be put to much better uses. For example, it would be enough to help towards their college or university education,  to pay for driving lessons, or to buy their first car, and if you ask your child at eighteen whether they’d prefer to have a car now rather than having you pay all that money to the bank just to have a bit extra to spend at Christmas, my guess is that they’ll go for the car every time.

The second reason is more fundamental. You are your child’s first and most important teacher, and they’ll copy what you do, whether you like it or not. The chances are your child is going to know exactly where you get the money for Christmas from, at least they probably will by the age of about nine or ten, and this means your actions are teaching them a very bad lesson about spending. This is that you shouldn’t save up for things like Christmas, but instead you should borrow money. Effectively, it normalizes living on borrowed money, and given that poor financial management and debt are one of the key reasons for adult unhappiness, you’re training them to follow a pathway that will most likely lead to them being unhappy for much of their adult life.

The third reason is personal. The chances are that if you borrow money for Christmas, you’re going to end up having to work harder and for longer hours to service that debt, and this means you’ll have less time to spend with your children. This might not seem like too much of an issue, but the more time you spend with your kids, the better your relationship with them will be, and the chances are, the better their relationships will be with their friends and family in their adult lives. Again, this is all about modelling the behaviours you wish to see in your child, and making time for loved ones rather than working yourself into an early grave to service a life in debt.

In addition, time spent with parents is something most kids crave much more than presents, and I’d bet that most of them would, when looking back at their childhood, choose to have parents who spent more time with them over having more money spent on them at Christmas. After all, let’s face it, how many of your childhood Christmas presents do you actually remember? There will be two, maybe three at the most, that really stick in your memory. Now compare that to the number of memories that you have of spending quality time with your parents, family and friends. I bet you not only have a lot more of them, but that they’re also better memories.

So, Christmas on credit is clearly a bad idea, but what are the alternatives? Well, the easiest thing to do is to plan ahead and save for Christmas, starting from the January before. This gives you time to put a little money away each week or month, possibly such a small amount that you won’t really notice too much, and build up a nice little nest egg to spend when December comes around. Even better, if you put this money in the right savings account, the bank will actually pay you money instead of taking it from you, so you’ll have even more money to spend. For example, if you put £500 into a savings account that pays 5% interest (okay, that might be a difficult rate to find these days, but it’s the principle here that’s important not the exact numbers, and it’s not a bad long-term average for interest rates on savings over the last eighteen years), then you’d get an extra £25 to spend. It doesn’t seem like much, but when you add it up over the years, that will be an extra £535 over eighteen years (given a 2% increase in the amount saved for Christmas each year). Saving money this way also provides a much better financial model for your children to follow, and they’ll learn that saving, and not borrowing, is the way to live their adult lives, leading to higher levels of adult happiness.

Of course, an extra £500 or so over eighteen years might not seem like much, and it’s not, but there are ways to not only turn this into much larger amounts, but also to teach your children important financial lessons about things like compound interest. To illustrate this, I’m going to take you through five scenarios which are reasonably easy to implement (at least in principle), and that can lead to you building up a nice long-term nest egg for your child by the time they turn eighteen.

The first strategy is to keep all the interest you earn on your Christmas savings rather than spending it. Over eighteen years (at 5% interest per year), this will give you £535 in the savings account. Not too much, but not bad either. It’d certainly be enough to pay for a holiday, or a set of driving lessons. The next strategy is to save £500 for Christmas in your child’s first year, but then only spend half of this money. The rest is left in the savings account. From then on, each year you save the same amount for Christmas and spend the whole amount saved in that year. Thanks to the wonders of compound interest, that will result in you having not £535 in the savings account (if you avoid spending the interest you get each year on your festive savings), but £1,388, and this is just from spending a little less on your child’s first Christmas, which let’s be honest, they won’t remember anyway.

Christmas On Credit Graph 3

Alternative strategies for saving for Christmas that will not only mean that you don’t end up in debt, but that will leave your child with a nice little nest egg by their eighteenth birthday.

Building on this strategy, there’s the issue that few children really get Christmas before the age of two, and they’ll remember very little of it. Instead, what they’ll get the most from is spending the day with you and being made a fuss of. So the third strategy is to save up money for your child’s first two Christmases and instead of spending it all on them, spend only a token amount and put the rest in a savings account for their future. Add to this all the additional interest you get on your Christmas savings each year and at age eighteen, they’ll probably be very grateful as they’ll have a little over £3,000 to play with, and that’s enough for a decent gap-year trip abroad, or help with the purchase of their first car. Again, this is thanks to the wonders of compound interest.

These are strategies that you can easily implement yourself, but there are others which you can use with the help of the other adults in your child’s life, It may make for some tricky conversations with aunts, uncles and grandparents, but the long-term benefits can make it worthwhile. For example, you could ask everyone in your family to put the money they’d spend on your child’s first Christmas into a savings account for their future. If this totals £1,000, then even with no other money added to it, other than interest at 5%, then this would become £2,292 by the time your child turns eighteen, which again, is a very useful amount of money to have set aside.

The final strategy that I want to highlight is one where everyone in your family puts 10% of the money they intend to spend on Christmas presents for your child into a savings account for their future. If this amounts to £100 in the first year (and rises by 2% per year), then this would be a whopping £3,261 by the time they’re eighteen. Now let’s face it, would your child actually know if everyone spent 10% less on them each Christmas? And just think of the powerful message it sends to your child about how important saving money for the future is?

Of course, many people will react badly to even the suggestion of this strategy because our consumer society has programmed us to prioritize instant pleasure over delayed gratification, but that’s exactly the reason so many adults are unhappy, and they’d be much happier, and successful, if they’d learned a bit of delayed gratification as a child themselves. However, rebelling against such programming is difficult for many of us, especially when we want to do anything to ensure our kids’ happiness. The key here is to remember that it should they their long-term adult happiness you should be thinking about, and not just whether they’ll have a Christmas this year filled with toys, that, for the most part, will be broken and forgotten about by the time Easter rolls around.

And if anyone in your family needs a bit of extra encouragement, then just show them the figures from this article, because the difference between the best strategy outlined here (everyone putting 10% of their annual intended spend into a savings account), and the worst (borrowing money on a credit card at 30% interest and only paying 90% of it back each year), is a staggering £11,623, and for anyone who wants to do as much as they can for their child, that’s a huge difference, and is probably more than all the money that would be spent on Christmas across the first eighteen years of your child’s life. Add to that the important lessons your child will have learned about how to deal with their finances from seeing you save for special events in this way, and you have a child who is likely to be substantially better off when they become an adult. Now, that’s one thing that will make for a happy Christmas, not just this year, but every year for the rest of their lives!

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About The Author: This post was written by Colin Drysdale, the creator of How To Raise A Happy Genius.




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