Here at Morningstar, we always put you, the investor first. That means, we focus on good, solid investment ideas that will stand the test of time.
We always recommend that investors plan and save for specific financial goals, and look at savings and investment as a part of an overall financial plan, that takes into account your personal circumstances, wants, goals, and desires.
Earlier this week, we got an unusual letter, published here in full:
Dear Morningstar,
Merry Christmas! You may know me as Saint Nick, the Jolly man from the North Pole, Benevolent Leader to millions of elves, the man who knows if you’ve been naughty or nice, and just plain old Santa Claus.
But Santa’s got problems.
The stock market’s been volatile, interest rates are rising, the prices of toys are through the roof! I’ve got to pay the elves, I need a new stable for the reindeer, Mrs. Claus needs a new kitchen (with state-of-the-art appliances) and frankly, after Christmas, I just want to relax, and kick back on a nice, sunny beach for the whole of January.
Can I afford it? Help me, Morningstar! Make me a nice financial plan, and you’ll shoot to the top of my ‘Nice’ list!
Ho! Ho! Ho!
Santa Claus
p.s. Leave out chocolate chip cookies, they’re my favorite.
Well! We didn’t want to get caught on the naughty side, so we got in touch with financial planning and personal finance experts, and put together a list of things that Santa should do to get a wholistic financial plan.
Step 1: All I Want for Christmas is a Budget
If Santa wants to meet all his long-term financial goals, he has got to keep track of his expenses, and keep an eye on his spending. The best way to keep a tight lid on overspending is to have a budget.
“Like all of us, Santa needs to stay on budget!” That's according to Morningstar’s director of personal finance, Christine Benz. “He and Mrs. Claus need to keep the household up and running, of course, but they should take a hard look at all of their discretionary spending to make sure they're able to meet their savings targets.”
Certified financial planner Jason Heath agrees. “We can all benefit from budgeting and planning ahead for extraordinary expenses, even Santa,” he says.
Step 2: It’s the Most Wonderful Time – to Set Goals
“Santa’s business is seasonal, so he has to budget for a lot of supplies, elf salaries, and so on, in December. If Santa doesn’t plan ahead, even he could be caught off guard. I suppose he’s been doing this long enough that he knows the routine, and that should be motivation for others to plan ahead like Santa, so as not to come up short at the last minute,” Heath says.
Santa has some of his goals laid out – he wants to retire in January on a nice, sunny beach, he needs to upgrade the Claus kitchen, and Rudolph needs a new shed. Santa will need to prioritise, quantify and set his goals. Can he afford them all? Maybe, or maybe not. He has to plan, and maybe save a little more – delaying his immediate gratification to get even more gratification – and maybe a couple of extra Mai-Tais – on that beach.
“The good news for Santa is that Christmas comes every year, on the same day. Assuming he plans to spend relatively the same amount on gifts each year, planning and investing for his annual gift outlays is fairly straightforward,” Benz says.
She also asks Santa the hard questions – like do Santa and Mrs. Claus really need that cable TV package, for example, because so many of their favorite shows are on Netflix? Could Santa and Mrs. Claus drop the gym membership and work out in their home gym instead? That way they won't have to battle blustery North Pole weather to stay in shape!
“I like the idea of letting their annual savings target dictate how much they can spend on discretionary items rather than vice versa”, Benz says.
So far, Santa’s plan looks like it’s right on track.
Step 3: I’ll Have a Blue Christmas – Without an Emergency Fund
“We all need to expect the unexpected – even Santa! A recently published National Bureau of Economic Research paper called 'Saving Regret' found the main reason people regret how little they save is financial shocks like unemployment, health, and divorce,” Heath says.
Remember when Grandma got run over by a reindeer? That was an emergency. And one thing that sure would have helped at that time is an emergency fund. An emergency fund is an important essential to any financial plan, no matter how old or how rich you are.
“Ideally, Santa should plan to save at least one year's worth of gift outlays each year, spacing his savings throughout the year and factoring those savings into his budget,” Benz says.
Frankly, because Santa works only in December, he is a member of the gig economy and so, an emergency fund is even more important for him.
- Image by Filip Mroz, via Unsplash.com
Step 4: Have Yourself a Merry Little Investment
Once Santa knows how much he needs to save for each Christmas, and has some socked away, it’s time for the fun part – investing!
“For funds for the next couple of Christmases – say, Christmas 2023 and 2024, Santa would want to keep the money in safe investments like money market funds or CDs. That's Santa's Bucket 1. He won't make much with that money, but nor does he want to risk it in higher-returning, higher-risk investments like stocks or even bonds. He'd hate to have to short-shrift the kids, or risk having someone go without altogether,” says Benz.
For Christmases 2025-2030, or thereabouts, she says that Santa can afford to take a little more risk with his savings. He can invest the cash for those Christmases in high-quality bonds, mainly, as well as perhaps a dash of high-quality equity exposure, Benz notes. With this component of the Santa portfolio, he'll likely earn more than he will on his cash investments and may also be able to out-earn toy inflation.
Fun aside, though Santa thinks that the price of toys has gone through the roof, the good news is that Toy-price inflation has actually been negative over the past 18 years, though it's anyone's guess if that will persist. Tariffs on imported toys have the potential to drive toy inflation upward in the years ahead, Benz says.
Finally, he can invest all of the funds for future Christmases – 2030 and beyond – in assets that promise higher returns in exchange for being willing to endure more price volatility –mainly stocks.
Santa won't be tapping this portion of the portfolio – Bucket 3 – for another 10 years, so he can afford to put up with some price swings, even big ones. A globally diversified stock portfolio makes sense here, Benz says.
Step 5: Let it Snow, Let it Snow, While I Go – To the Beach!
Once all his plans are in place, and his investment is done, Santa needs to start thinking about his life after Christmas – what us non-Santa folk call retirement.
“Santa’s busy Christmas schedule is a bit of a metaphor for financial planning. If Santa does the right things the other 11 months of the year, his December can go smoothly. And as people plan ahead for retirement, there’s a degree of delayed gratification that needs to happen so that retirement goes as smoothly as possible as well,” Heath says.
He points out that Santa spends a lot of downtime over the course of the year. And so too will many of us spend a long time in retirement.
“It’s not unreasonable that many of today’s retirees will spend 30 or even 40 years retired. For some of us, that could be equal to or even more than the time we spend working. Defined benefit (DB) pensions used to make it easy for people to plan for their “off season” in retirement. But these days, there’s much more pressure on individuals to build their own retirement nest egg,” Heath says.
He warns that while it’s ok to have a long list of Christmas wishes for Santa, even Santa has to set limits. After all, he only has so much room on that sleigh of his. So, too, do savers need to prioritise their needs and wants to ensure a merry retirement.
