How not to save for Christmas

With house prices tumbling, a recession almost certainly already here, and fears over job security growing, the last thing that many people can afford this Christmas is a massive blow-out.

Unfortunately, as well as being the season of goodwill, Christmas is also the season of intense guilt. And the more that people feel they won't be able to provide a Merry Christmas for their families this year, the more guilty they'll feel.

It's a point that companies are more than willing to remind us of. In a recent press release highlighting its Christmas savings scheme, Asda's head of financial services, Gev Lynott is quoted as saying: "We're all feeling the pinch this year and this easy solution to saving is a great way to ensure your family can enjoy the great festive celebration they deserve."

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Christmas clubs: how not to save for Christmas

Asda's savings scheme allows investors to rack up money on a savings card, by making payments in the store which can then be added to the card. The money thus saved can then be spent on Asda products. It's been running for several years now and according to Asda's press officer, it offers the best bonus of any similar products. It pays a £6 bonus on November 17th to any customers who have at least £144 saved (those with £97 get £3, and those with £49 get £1). The idea is to save up money during the year, and then use the savings card to pay for Christmas.

People take out these accounts because they say it helps them to budget they can put away some money every time they do the weekly shop. And the good thing about schemes like this is at least people are thinking ahead and planning for Christmas. However, it's important to be aware that you're paying quite a premium for this budgeting assistance.

For one thing, the £6 bonus equates to an annual interest rate of 4.2%, which is poor compared to best buy accounts you can easily find a tax-free, instant-access Isa account paying well over that, even if you don't venture anywhere near the top of the best buy tables.

For another, if you put your savings in a bank, then you can spend them on anything, at any time. If you put them on an Asda card (or any other sort of gift card for that matter), then you are immediately locking your spending in to one shop. That's great news for the shop, but it means you are sacrificing flexibility.

Why flexibility is important right now

And flexibility is probably the most important thing for your finances right now. Yes, people who take out an Asda card might like the idea of restricting themselves so that they can't break into their Christmas budget for something else. And budgeting ahead for Christmas is certainly a good idea.

But putting restrictions on where you can spend your money isn't. Ultimately Christmas is important, but the amount of money you spend on it is entirely optional. If a genuine financial emergency comes up as is more and more likely to happen as the economy worsens then you want to have money to hand to cushion the impact. If that means delving into your Christmas savings, then you have to be able to get at them.

A better bet would be simply to open a bank account, and name the account 'Christmas'. Then put a set amount of money into it every month. The money is then still accessible if it's needed for something else, and if you choose the right account, it will also earn a better rate of interest. Compare savings accounts here.

And this point about flexibility goes beyond Christmas. If you're one of those people who simply throws caution to the winds during the festive season and simply puts everything on a credit card, then this year's the year to break that habit. Any debts you saddle yourself with now are only going to become harder to pay in the New Year. Even if your job is relatively safe, lenders are likely to continue reining in spending, and cheap credit card deals will become ever harder to find.

So think about what you realistically plan to spend this year it's not too late, there's still two months to go until December 25th and look at what you need to save up between now and the big day. If you can't make the sums add up, then you should be looking at where you can cut back not how much you can borrow to make up the difference.

This article is taken from Merryn Somerset Webb's weekly Money Sense email. Sign up to Money Sense here.

Merryn Somerset Webb is away.