Holiday Club Accounts - An Easy Way to Save Money While Avoiding Debt

By: Zenon Olearczuk
Submitted: 2007-01-17 16:17:39
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It’s that time again. Just as you’ve finished paying off your debts from the previous year, another holiday approaches. Another year to buy things with money you don’t have. You told yourself that somehow this year would be different -- that you would be disciplined enough not to run up $1,000 or more in credit card debt buying gifts for family and friends. But, despite your good intentions, the rainy-day money you saved up along the way somehow got spent on unforeseen events. And so, the cycle repeats itself again.

Let’s face it. We’ve been conditioned to spend, spend, spend, whether we have the money to pay for it or not. Getting your finances under control does not necessarily mean having to earn more. To get ahead financially, try learning to be more disciplined with your spending and savings habits. If you’re one of the millions who prefer to use credit cards instead of cash -- either as a matter of convenience or simply because you do not have the cash on hand -- then a Holiday Savings Club Account may be the right savings solution for you.

Club Accounts were popularized by credit unions seeking to offer their members a convenient way to save up for special events without having to access their existing accounts. They were created to help people get out of the trap of buying things now and paying for them later. Although they typically do not offer the best savings rates, they do provide shoppers with a structured way to plan for expenses.

According to the latest Informa Research Services data, Club Accounts pay the same as regular savings accounts (.56% - .71% on average), with some credit unions offering competitive Money Market rates of 2% or greater. Compare this to a credit card with an annual 13.73% interest rate, where paying only the monthly minimum can increase your monthly finance charge to 24% or more. For the latest rate information visit MSN Money at http://moneycentral.msn.com/loan/home.asp?iType=8.

How Club Accounts Work

Whether you’re saving up to buy Christmas, Chanukah or Kwanza gifts, or planning a vacation, all Club Accounts contain the same elements:

• A set time limit – Although Club Accounts can be opened any time, the Holiday Club typically starts in early November and runs through the end of the following October. Generally known as a “Christmas Club” Account, all funds in the Holiday Club Account are made available in time for the biggest shopping day of the year! Vacation Clubs, on the other hand start around June 1 and end the next May, so the money can be used for a summer vacation.
• Automatic savings – While funds can be added to an account at any time, all clubs require some form of automatic or systematic deposits. Customers determine the amount and frequency of the funds transfer either through payroll deductions or direct transfer from another account. Most Club Accounts can be opened with a low minimum balance of $1 to $25 with no monthly service fees.
• Interest earned – Dividends are typically compounded monthly with interest re-invested into the account. Most accounts earn the standard interest rate you would obtain from a regular savings account or interest-bearing checking account. Some are tiered -- which pay a higher amount based upon the balance in the account.
• Penalties – Early withdrawals are typically not allowed, with dividends being forfeited before the allotted time. Some clubs offer one withdrawal during the term without incurring penalties.
• Withdrawals – At the end of the yearly term, the balance earned in your account for that year, less the minimum amount to keep it open, rolls over into your standard checking or savings account. Here, withdrawals can be made either in person, by ATM debit card, or check.

How Do You Know If a Club Account Is Right For You?

Club Accounts let you accumulate a small amount of money over a short period of time. Maybe you’re a parent looking for a convenient way to save up for family gifts? Or a student, needing extra cash for those unforeseen college expenses or Spring Break vacation? Couples may find it invaluable for covering holiday expenses or the cost of a newborn -- even seniors on a fixed income looking to stash away extra cash for that emergency medical expense.

Some banks and credit unions also offer additional incentives to help teens or children develop good financial savings habits. ID cards featuring cartoon characters along with rewards are given to encourage deposits. Club members are offered participation in promotions or receive special cards on their birthdays -- all done in an effort to help them establish good credit as a young adult.

Although you can earn more from a money market account, Club Accounts are a specialized product designed to assist people in saving for a specific occasion, rather than incurring debt. It helps people to develop good spending habits, by allowing them to carry a balance forward, instead of paying it off each month.

How Much Should You Set Aside Each Month?

Determining the right amount to put into a Club Account is a lot like setting up a 401K plan. Instead of a long-term retirement goal, how much do you need to buy everyone on your list an adequate gift at the end of the year?

Maybe mom likes that gift basket that usually costs $50. Or dad has a new power tool that he wants to add to his set. You know the kids want the latest video games. The gardener and newspaper carrier get the standard $20 gift certificate. As you begin to include everyone on your list, the number becomes much clearer.

Once you come up with a monthly average, your payroll deduction or systematic savings transfer should reflect this number. Treat this transfer as you would any other expense, knowing that the funds you set aside each month or pay period will be available later as a cash windfall and not a credit expense when you need it the most.

© 2006 Informa Research Services, Inc.

Article source: Expert Articles