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Holiday Accounts: The Pros and Cons
If you have invested in a holiday account, then you probably withdrew your money in the last several weeks. No doubt, you collected just a little bit more than you invested, since holiday accounts are interest bearing. If you didn't use a holiday account and you're scrambling to fit Christmas into your budget, you may be regretting that you didn't open one at the beginning of last year.
How beneficial are these accounts? Did you make the right choice by opening one? Certainly saving is the right answer, but would you have been better off putting the money elsewhere? The many pros and cons of opening a holiday account have been listed below, and although it is too late to change your decision for this year, January is right around the corner.
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Pros
The number one advantage to holiday accounts is that they set up a system for savings. Most lenders allow you to set up direct deposit from your regular checking or savings account, so that a portion of your check automatically transfers into the account at set intervals. If you use the account appropriately, at Christmas, you will no longer be searching for the money to pay for gifts or other holiday items. The built in penalties may also curb your temptation to withdraw the money for things that are not emergency expenditures.
The second advantage to holiday accounts is that they do earn interest. The amount of interest will vary by lender, but generally they earn in the same category as a savings account; therefore, if you invest a considerable amount of money, you will earn a little extra. However, if you only deposit a small amount, then the interest income will be negligible.
The convenience of the account is also an additional bonus. Most holiday accounts will automatically transfer your money into your checking account on the appropriate date. If your bank doesn't allow you to automatically transfer the funds, most lenders will allow you to transfer the money via internet banking.
Holiday accounts also do not generally require a minimum deposit. However, many will not become interest bearing until you invest a certain amount. From a practical standpoint, without a substantial investment, you won't earn a large return anyway.
Cons
Although saving for Christmas is nice, if you suddenly need the money for an emergency car deductible or medical bill, you may incur fees if you withdraw the money early. Your lender will give you the exact amount, but the amount you lose in fees maybe larger than the interest you would have earned had you left the money in until the withdrawal date. These fees would not apply with a regular savings account, although the interest rate maybe slightly higher with the holiday account.
Even if no emergency exists, the dates for withdrawal may also be inconvenient. Most holiday accounts set a specific date for withdrawal sometime in mid-November. However, if you want to get a jump on your Christmas shopping, if you use a holiday account, then you are limited to using the funds after the date or risk incurring hefty fines.
If you do shop around and find a lender that offers a higher interest rate, you may have to open a checking account with the institution as well. If you do not, then the advantage of internet banking or intra-bank transfers maybe diminished.
Holiday accounts are useful for you if you have an emergency fund already in place. You could afford to not have access to the account for almost a year. However, if you might need the money before the end of the year, then you would be better off putting the money into a regular savings account, where you wouldn't be penalized for withdrawals.
Published on BankingQuestions.com 12/15/08
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