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

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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.

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

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.

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 Bank Spending Account (Ally's checking product), transferring money is easy and fast.

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.

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 Capital One QuicksilverOne Cash Rewards Credit Card (more suitable for average credit) allow cardholders to schedule automatic cash-back redemption to a linked bank account once you hit a specific earnings threshold ($25 and up).

If you're looking for a quick savings boost, consider opening a card with a generous welcome bonus. Right now, new cardholders of the Blue Cash Preferred® Card from American Express can take advantage of earning as high as $300 cash back after spending $3,000 in purchases on your new Card in the first 6 months. Apply to find out your offer. If approved, you'll: 1. Find out your offer amount, 2. Accept the Card with your offer, 3. Spend $3,000 on purchases in your first 6 months 4. Receive the cash back. Cash back is received in the form of Reward Dollars that can be redeemed for a statement credit or at Amazon.com checkout. Welcome offers vary and you may not be eligible for an offer.

This deal is a good one if you feel confident you can pay off your balance on time and in full. Cash-back cards are a smart way to save a little money if you use them wisely.

*Information about the Ally Bank Spending Account has been collected independently by Select 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.

Ally Bank is a Member FDIC.