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Advice

Why you should open a holiday savings account that's separate from your emergency fund

CNBC Select spoke with Regions financial wellness manager Donna Medina about why you should have a separate savings fund for holiday spending.

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While the hustle and bustle of the holiday shopping season normally begins around Black Friday and Cyber Monday, things are getting started a little early this year with the two-day Amazon Prime Day event starting Oct. 13.

But don't worry, there's still time to plan. If you haven't already, take a look at your budget in the months leading up to December so you can decide how much you want to spend on gifts, travel and more. If you don't, your January credit card bill may catch you by surprise, with a big holiday debt hangover in the new year.

"Your first step is identifying what your spending budget is going to be for the holidays, says Donna Medina, financial wellness relationship manager at Regions Bank. Medina recommends making a list of people you're buying gifts for, plus other costs like greeting cards, decorations, travel, lodging, food, and various tips you might want to pay housekeepers, doormen, pet sitters, etc.

Regions Bank, like many financial institutions, has a budget worksheet, or you can simply make your own using Excel or Google sheets, or even old fashioned pen and paper.

Once you decide on a holiday budget, it's time to start saving. "I would recommend opening a second savings account dedicated to holiday needs," Medina says.

Below, CNBC Select spoke with Medina about setting up a holiday savings account and how to prime your finances for the giving season and beyond.

What is a holiday savings account?

Some banks and credit unions offer special low-fee savings accounts for year-round savers to set aside holiday gift money. Sometimes, they're offered during limited-time windows throughout the year, which varies by institution. Some holiday savings accounts come with helpful perks, such as automatic savings deposits and the option to pick an annual disbursement date to receive the cash you saved up all year.

For instance, the holiday savings account at 1st Source Bank lets clients set up automatic transfers from their checking account on a weekly, monthly or bi-weekly basis. Every October, clients receive a paper check or electronic deposit in the amount of their yearly savings, plus interest.

However, a holiday savings account can be any kind of separate savings account that you open in addition to your emergency fund. When you put that extra cash into a high-yield savings account, you can earn more than 10 times the interest you would on a traditional savings.

Learn more: Consider these 4 important factors when choosing the best high-yield savings account for your money

Why it makes sense to open a dedicated holiday savings account

Having a holiday savings account is important so you're not tempted to dip into your emergency fund. Most experts recommend having at least three months' worth of savings put aside for a rainy day, and as the coronavirus pandemic drags on, it shows how important it is to have that safety net.

"Really six months is an updated recommendation, especially as a result of the Covid-19 outbreak," says Medina.

Building up an emergency account is easier said than done: According to the most recent installment of Clever's Covid-19 Financial Impact Series, over half (61%) of Americans will run out of emergency savings by the end of 2020, or they already have.

If you do have an emergency savings account, it's important not to dip into it when you need extra cash — especially around the holidays. By creating a separate savings account, you can make a clear plan to meet both goals, whether that's cutting expenses or taking on a side hustle or both.

The Ally Online Savings Account lets account holders organize their savings all in one place by creating up to 10 different "buckets" inside the same account. Think of nicknames that work for you, such as "holiday gifts," "travel" and "emergency fund." These buckets make it easy to separate your emergency fund from your holiday cash without opening a whole separate account. If you link your Ally savings account with an Ally Interest Checking Account, transferring money is easy and fast.

Ally Bank Online Savings Account

Ally Bank Online Savings Account
On Ally Bank's secure site
  • Annual Percentage Yield (APY)

    0.60%

  • Minimum balance

    None

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    $10 per transaction

  • Overdraft fees

    $25

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes, if have an Ally checking account

See our methodology, terms apply.

Pros

  • Strong annual percentage yield on all balance tiers
  • No minimum balance
  • No monthly fees
  • Up to 6 free withdrawals or transfers per statement cycle*
  • Option to add a checking account
  • ATM access if you have a checking account

Cons

  • $10 fee per transaction if you make more than 6 in a statement cycle
  • $25 overdraft fee

Tips to grow your holiday savings year round

With less than two months left until December, and less than three until the new year, it's not too late to start saving for the holiday season now. Make saving easier by looking for deals and tracking major sales, including Amazon Prime Day.

You might even want to look for a seasonal job or side hustle to earn a little extra cash to cushion your spending, says Medina.

There's another way you can pay for holiday expenses: your credit card rewards: "Boost your savings account with credit card rewards," says Medina. When you have a good cash-back credit card, you can cash in your rewards for statement credits to cover the gift shopping you've done with your card.

One way is to link a cash-back card to your savings account. Set up an automatic redemption linked directly to your account so that your rewards go directly into your savings. Medina recommends linking your cash-back rewards card to a secondary savings account, such as your holiday account, so you can passively grow your savings all year as you regularly use your card for everyday spending.

Both the Capital One® Quicksilver® Cash Rewards Credit Card (requires excellent credit) and the QuicksilverOne® Rewards (more suitable for average/good credit) allow cardholders to schedule automatic cash-back redemption to a linked bank account once you hit a specific earnings threshold ($25 and up). The same goes for the Capital One® Savor® Cash Rewards Credit Card (requires excellent credit).

If you're looking for a quick savings boost, consider opening a card with a generous welcome bonus. Right now, new cardholders signing up for a Blue Cash Preferred® Card from American Express can take advantage of a $300 statement credit after spending $3,000 in purchases on their new card within the first six months (compared to three). The card has also updated its annual fee, waiving it for the first year: $0 introductory annual fee for one year, then $95. (Offer expires Dec. 10, 2020.)

This deal is a good one if you typically spend $3,000 within six months and you fee confident you can pay off your balance on time and in full. But cash-back cards are a smart way to save a little money if you use them wisely.

Blue Cash Preferred® Card from American Express

Blue Cash Preferred® Card from American Express
On American Express's Secure Site
  • Rewards

    6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back at U.S. gas stations, 3% cash back on transit including taxis/rideshare, parking, tolls, trains, buses and more and 1% cash back on other purchases

  • Welcome bonus

    $250 after you spend $1,000 on eligible purchases within the first 3 months from account opening

  • Annual fee

    $95

  • Intro APR

    0% APR for the first 12 months on purchases and balance transfers

  • Variable APR

    14.49% to 25.49%

  • Balance transfer fee

    3%, $5 minimum

  • Foreign transaction fee

    2.7%

  • Estimated rewards earned after 1 year

    $691*

  • Estimated rewards earned after 5 years

    $2,457

See rates and fees and our methodology, terms apply.

Pros

  • Unlimited 6% cash back on select U.S. streaming subscriptions
  • High 6% cash back at U.S. supermarket spending (up to $6,000 a year, then 1%)
  • Unlimited 3% cash back at U.S. gas stations and on transit
  • Amex Offers, which provide statement credits at select merchants
  • A year of no interest on new purchases and balance transfers

Cons

  • $95 annual fee
  • 2.7% fee on purchases made abroad

Who's this for? If you prefer to Netflix and chill instead of going out on a Friday night, the Blue Cash Preferred® Card from American Express can earn you the most cash back on select U.S. streaming subscriptions at 6%.

There are 25 streaming subscriptions that qualify for 6% cash back, including popular services like Netflix, Hulu, Spotify and Prime Video Unlimited, as well as services that are typically not included among other cards, such as ESPN+, Audible and YouTube.

Cardholders can also earn 6% cash back at U.S. supermarkets on up to $6,000 per year in purchases (then 1%), unlimited 3% cash back at U.S. gas stations and on transit-related purchases, such as tolls, parking, buses and rideshares, and 1% cash back on all other purchases.

Additional perks include money-saving Amex Offers, which provide discounts and extra points at participating retailers. For example, right now if you spend $9.99 or more at Pandora.com, you get a $9.99 statement credit, through December 18. These limited-time offers are location-based and additional terms apply.

This card does come with a $95 annual fee, but it can be offset by the cash back you earn and discounts you can get through the Amex Offers.

*First year rewards total incorporates the points earned from the welcome bonus

Don't miss: The Amazon Prime Visa gift card bonus is now $100—just in time for Prime Day in October

Information about the Capital One® cards has been collected independently by CNBC and has not been reviewed or provided by the issuer prior to publication.

For rates and fees of the Blue Cash Preferred® Card from American Express, click here.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.