By Kyle Foito, CFP®, Wealth Advisor
Every year, like clockwork, we spend more during certain seasons. Summer vacations, back-to-school shopping and holiday gifts are all events that come up regularly, and can be anticipated and planned for. But what’s less predictable is the impact these bursts of spending can have on your financial goals if you’re not paying attention.
Seasonal spending isn’t inherently bad. It can be a great way to enjoy life and celebrate milestones. But without the proper financial guardrails in place, it can easily become a threat to your long-term plans. With the right strategy and mindset, however, you can manage these expenses without derailing your goals.
Seasonal spending highlights a pattern many people already fall into: spending first and investing whatever is left. This strategy puts investing on the back burner, making it inconsistent and reactive. It is unreliable even in normal spending months and becomes especially risky when expenses spike during the holidays or summer. Seasonal spending tends to creep up in cycles, and if you are not planning, you may seriously set back your investment goals.
What makes seasonal overspending dangerous is how quickly compounding can start working against you. As investors, we know about the power of compound interest when it comes to growing your wealth, but it also applies to debt. And in many cases, the numbers work against you. For example, credit cards now average around 24% Annual Percentage Rate (APR),1 which is significantly higher than the return you can reasonably expect from most investments.
When people don't plan for seasonal expenses, they may end up dipping into emergency funds, taking out personal loans, or even withdrawing from retirement accounts to cover the gap. These options might feel like temporary fixes, but they have long-term consequences. Loans increase your monthly obligations, early withdrawals from 401(k)s often result in taxes, penalties2 and credit card balances, if not paid off quickly, can turn a short-term expense into a long-term financial burden.3
People often overestimate how quickly they will be able to pay back debt. Those timelines tend to get interrupted, and meanwhile, interest accumulates. What started as a one-time expense can quietly snowball and create ongoing pressure on your financial plan.
The Solution: Structure, Strategy, and Automation
The above illustrates why seasonal spending needs to be addressed directly. Without a short-term strategy in place, even one overspend can disrupt your progress toward long-term goals.
The starting point is creating structure. That means knowing your fixed expenses, understanding your discretionary spending and identifying your short- and long-term goals. Seasonal spending should not be treated as a surprise. These events happen every year, and your budget should reflect that. Set aside money throughout the year for things like vacations or holiday gifts, just as you would for rent or groceries.
The next step is building a strategy that supports both the life you are living now and the future you are working toward. That includes having a fully funded emergency fund. The typical recommendation for an emergency fund is three to six months of essential living expenses,4 but the right number depends on your comfort level and personal situation. With that in place, you're less likely to turn to high-interest debt when unexpected or seasonal costs arise.
Automation is what ties it all together. When your savings and investments happen automatically, you avoid the common trap of saving or investing whatever is left. This can include setting up regular transfers to investment accounts and contributions to your emergency fund. If the money is moved before you see it, you’re far more likely to stay consistent and on track. This approach also applies to seasonal spending. Setting up a small monthly transfer to a separate account for travel, gifts and other known expenses can help avoid a snowball effect later in the year.
If you do overspend, which happens, avoid panic decisions. Before dipping into retirement savings or carrying a credit card balance, talk with an advisor to explore smarter ways to rebalance your plan and get back on track. The goal isn’t perfection. It’s consistency.
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Exencial Wealth Advisors is an SEC registered investment adviser. Any references to the terms “registered investment adviser” or “registered,” do not imply that Exencial or any person associated with Exencial has achieved a certain level of skill or training.