An email circulated through my office the other day. It read: “Christmas Club contributions will be included on the next pay period.” The email then reminded everyone that enrollment into next year’s Christmas Club had just opened up.
It got me to thinking… is the Christmas Club worth it?
For those unfamiliar, a Christmas Club is a mechanism for forced savings. You opt-in to the program through your employer. They in-turn withhold a portion of your earning from each pay check. Over the course of the year the contributions stack up, and then they are released to the employee in a lump sum just before Christmas.
The Good
A means for automating savings is a good thing… because us Americans are terrible at doing so ourselves. According to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017:
“About 40 percent of adults said that if faced with a $400 unexpected expense, they would either not be able to pay it or would do so by selling something or borrowing money”
Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2017
Combine this lack of savings, with a penchant for Christmas spending and you have a real dilemma. According to Gallop:
Gallop – Americans in the Mood to Spend This Holiday Season
“U.S. adults currently estimate they will spend an average $885 on gifts this year. “
So, if we can’t come up with $400 for an unexpected expense, how do we handle an expense that is more than double that? Most likely credit card debt. A survey of 1,000 Americans by Swagbucks (Prodedge) in November 2018 found that 63% of American’s go into debt during the holiday season. So that is most definitely no bueno.
In looking at the issue from this perspective, Christmas Clubs look like a pretty good deal.
The Bad
Most Christmas Clubs offered by employers (mine being one) do not include interest. Some credit unions do offer interest-bearing Christmas Club accounts, but their interest rates pale in comparison to other options.
So, essentially, you are investing in your Christmas spending, but with no realized return. In the meantime, your employer gets a free loan of your money! Sounds like a great deal for them!
If I can’t access my money, I want some kind of return for it. At a minimum, I would hope for some tax deduction. But alas, Christmas Club contributions are not tax deductible.
The Ugly
Most Christmas Clubs limit withdrawals to November or December. Some include penalties for early withdrawal. At my work, any early withdrawals have to be submitted to the Director for review and approval. Then you are ineligible for future deductions that year. AKA, they kick you out of the program for the year.
Since most Americans live paycheck to paycheck, the Christmas Club deduction can be a double-edged sword. If an unexpected expense crops up (car trouble, HVAC issue, health problem, etc.), there are less dollars available to cover the expense.
This forces you to either apply for an early deduction from the Club, which could result in penalties, or at least an uncomfortable conversation with a co-worker, or to going into debt. Wasn’t that what we were trying to avoid in the first place!!
In summary:
- You don’t get a return on your money for tying it up
- Your company gets an interest-free loan of your money
- There’s no tax deduction
- There could be a penalty for early withdrawal, or at least a very awkward situation where you have to explain your personal issues to a co-worker
Yuck, no thanks! You can keep your Christmas Club!
Are There Better Options?
Why, yes. Yes, there are.
I previously posted on various strategies for short term savings. Since we are looking at a goal of a year or less, I don’t believe stocks or bonds are good options due to volatility and transaction fees. I will highlight a couple workable options below.
Certificates of Deposit
Certificates of Deposit (CDs) are promissory notes from a bank that pay you interest during the allotted time period. A CD is insurable by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per individual.
At the time of this post, the rates on 2-year CDs averages about 2.5%. That’s way more than the 0% the company’s Club pays!
CDs are available with maturities (i.e when you get your money and interest back) lengths ranging from a few months to years.
If you had a chunk of money available, say from a tax return or even regular savings, you could choose a CD with a maturity date of just before Christmas. While your money is deposited, you are essentially prohibited from withdrawing the money. If you do so you will likely incur fees and penalties.
A downside to this option is that you would need a sizeable pile of cash to open a CD. Typically, a minimum deposit is $500 to $1,000. Another hang up is similar to the company Club, where you cannot get your money out earlier without some grief (fees and penalties in this case).
High Yield Savings Account
Don’t be confused, this isn’t your ordinary savings account that earns a whopping 0.03% interest. High Yield Savings Accounts (HYSA) are typically offered online by brick and mortar banks, online only banks, credit unions, and credit card companies. By federal law, the amount of withdrawals a month is limited (typically up to 6 times a month). Also, like CDs, HYSAs are FDIC insured… there is basically no risk of losing your money.
Usually money is withdrawn with a transfer, such as an Automated Clearing House (ACH). This can take a couple business days to complete so most HYSAs are not set up for spontaneous purchases.
Interest rates vary, but currently you can get anywhere from 2 to 2.36%. You aren’t getting rich, but at least you are keeping up with inflation.
HYSAs can have low, or no, minimum deposit. Some even offer cash bonuses for opening one up! We used Nerd Wallet when evaluating HYSA options.
Strategic Use of A Rewards Credit Card In Conjunction with a CD or HYSA
One way to juice up your return from either a CD or HYSA would be to make all your Christmas gift purchases with a rewards credit card (travel or cash back… whatever your fancy).
Whoa whoa whoa… Now hear me out. First a disclaimer: if you have the slightest suspicion that you will not have enough to pay the credit card balance in full, then just stop reading.
The key here is to make sure you can withdraw from the CD or HYSA before the balance is due. You will then withdraw those funds to pay your balance; thereby, banking the points or cash back. If you are going to spend a bunch of money, you might as well get some cash back or points, right? Who knows, this spending could put you over the threshold for a significant point bonus.
Reduce your Holiday Spending
A bit more controversial here. And a disclaimer: I consider myself a terrible gift giver. If it wasn’t for the thoughfulness and care of Mrs. Heartland on FIRE, people would probably think I was Scrooge. So, the ability to cut back on holiday spending comes naturally to me. It is not this way for many others.
The tradition of gift giving is very strong and the pressures from family and friends to play Santa can have quite a pull. Done tastefully, gift giving can be very rewarding for both parties and lead to some unforgettable memories.
But do you really need to spend $885!!
The study didn’t point out what size family that spending was for (it could even be per adult!), but let’s assume it is a family of 4. That’s basically $300 per person. Now I realize, that this doesn’t include extended relatives and coworkers and the costs of greeting or post cards. Running the numbers, I can see how this number can come to be. Below is what I would consider to be a fairly standard breakdown for a middle class family:
- Kiddos, $200 each (2)
- Spouse, $100 each (2)
- Parents, $50 each (4)
- Siblings, $50 each (4)
- Close Coworkers, $20 each (4)
- Greeting Cards, $50
That’s $1,130!!
I used to work with a coworker who routinely purchased gifts for our entire department, around 30 people. I can’t imagine the amount he racks up each year. Just how much impact does a $10 gift make to a coworker that you maybe walk past once or twice a day, anyway? I know that, for me, receiving a gift from this person felt awkward, and I felt stress from the fact that I wasn’t planning to reciprocate. I’m sure that result is contrary to what he intended.
I don’t advocate simply eliminating your gift giving, but instead of spreading money around like grass seed, I suggest you think about the value of your gift giving. Make a conscious decision about it, rather that simply doing what you’ve always done.
Can you narrow your gift giving circle to only immediate family? Are there ways to express your feelings in a more cost-efficient way? How about a generic greeting card with a carefully considered, thoughtful, message? That’s a cheesy example, but it demonstrates the thought process.
If you are considering reducing your gift spending I recommend that you discuss your intentions with your family as early in the year as possible. This can help avoid any hard feelings resulting from them buying you something and you showing up empty handed! You just might find they are thinking the same thing.
I know that we did when couple years ago we proposed the idea of limiting gift giving between my parents and siblings. (The little ones still receive gifts). It was like a big weight was lifted from everyone’s shoulders. We all realized, that at our age, all we really want is each other’s presence not presents.
Instead of buying gifts, we can invest the savings and buy ourselves time and piece of mind! That beats an ugly sweater every time!
Thanks for reading!