Though the holiday season seems like a far-off reality, it could very well sneak up on us -- and our wallets. Christmas club accounts were designed by banks during the Great Depression to keep families out of hock and able to enjoy a festive holiday season. They offered a painless way to plan ahead and save money for shopping at the end of the year. Though the payment plan concept has changed over time, there are quite a few options today to help you jump-start your holiday financial planning.
A Christmas club account is a short-term savings account that is funded by setting aside a small designated amount from each paycheck throughout the year. The bank deposits the money back into your checking account about a month or two prior to the holidays. Usually, only one penalty-free withdrawal is allowed per year. The assumption is that if you have easy access to savings, you might spend it on something else. According to the NerdWallet 2016 Consumer Holiday Spending Report, 44 percent of shoppers incur debt during the holidays, and they pay off the balance over an average of two months. The club account acts as a dedicated savings account to promote financial discipline.
The use of these accounts reached its peak in the 1970s, and most banks have dropped the program in recent years. But credit unions and community banks have picked up the slack, providing options for those who still want a way to guard their money and avoid massive credit card debt in the new year. According to the Credit Union National Association, about three-quarters of credit unions offer Christmas clubs.
Beyond the holiday accounts, special-use accounts exist for other purposes. The U.S. Postal Service Federal Credit Union, for example, offers vacation clubs and tax clubs. This goes to show that the concept is widening to become a general savings tool.
One savings technique that is often considered old-fashioned but is making a comeback is layaway, in which consumers pay for an item in installments while it is kept at the store. Though layaway programs were largely dropped by retailers for some time, they appeared more and more during the Great Recession. Courtney Jesperson, the retail expert at NerdWallet, says that layaway is a great option for those who want to purchase hot-ticket items, such as toys and electronics, but can't afford to purchase them right away. Plus, it guarantees that items won't be sold out.
Laura Shin writes for Chase Bank that every store has a different layaway policy, but they often ask for a 10 percent down payment to start. What's more, some stores offer variations on no-fee plans. Shin says: "Walmart has waived fees entirely, Toys R Us offers a no-fee layaway promotional period, and Burlington Coat Factory offers a $5 promotional card upon completion of your payment. Stores like Kmart and TJ Maxx have fees of just $5 to $10. Some stores let you make payments online." Consumers should look for other fees associated with layaway plans.
Money market accounts and certificates of deposit offer higher yields on your investment, and both have pros and cons. Money market accounts can be usually be opened with a small investment but need a higher balance in order to accrue any interest; while there is no set period that funds are inaccessible, most money market accounts limit the amount of withdrawals that can be made. Certificates of deposit, or CDs, are safe, low-risk investments, but they are timed deposits, meaning you agree to keep your investment there for a specified term. The good news, according to The Wall Street Journal, is that the interest rate is determined ahead of time, and you are guaranteed to get back what you put in, plus interest.
If opening a whole new savings account doesn't seem right for you, one more option is to load money onto a prepaid credit card throughout the year to use only for gift purchases. Or, if you know you will be using a regular credit card to shop, look for one that gives cashback bonuses for every dollar you spend. Collect the cashback earnings after shopping and put them right back into your savings account.
Whatever method you choose this year, make sure that you read all the paperwork and know exactly what fees, penalties, balance requirements and dates pertain. With these options, you're free to shop till you drop because your financial well-being won't.