How to Use a High-Yield Savings Account for Holiday Budgeting

Quick Answer

With a high-yield savings account, you can set money aside for the holidays and earn interest on your savings. Your holiday funds will remain separate from your other money, and you can draw on the account as needed.

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A high-yield savings account can be a great place to stash your holiday spending money. You'll earn interest on your savings, and your funds won't get tangled up with your checking account. Opening and using a high-yield savings account is relatively simple. Here's how to use one for holiday budgeting—along with some tips for saving for holiday expenses.

Why Use a High-Yield Savings Account for Holiday Budgeting

Using a high-yield savings account to hold your holiday funds has a variety of advantages.

It Keeps Holiday Funds Separate From Other Money

If you're squirreling away money for the holidays, your checking account may not be the best place to keep it. Mixing your money can make it difficult to keep track of your holiday spending. If you don't hold on to receipts and stay up to date on the totals, you could end up accidentally using money that's meant for bills and other expenses.

Using a high-yield savings account can also protect your holiday funds. If that money is sitting in your checking account, impulse purchases might feel more tempting.

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You'll Earn Interest

One of the biggest advantages of using a high-yield savings account is that your holiday money will earn interest. The average interest rate on a traditional savings account is currently just 0.45%, according to the Federal Deposit Insurance Corp. (FDIC). High-yield savings accounts tend to offer much higher rates. Some are currently as high as 5.35%. That means you'd earn $53.50 for every $1,000 you have saved. A competitive rate can help you save even more money for the holidays.

You Can Automate Your Savings

Whether you open a high-yield savings account with your current bank or go with a different financial institution, you should be able to link it to your checking account. That allows you to set up automatic transfers straight to your holiday fund. Let's say you want to save $75 every month beginning in January. At that rate, you'd have $825 by the end of November. Automatic transfers have a set-it-and-forget-it structure that takes some of the work out of saving.

Your Money Is There When You Need It

High-yield savings accounts are known for their liquidity. Every financial institution is different, but most allow you to make up to six free electronic withdrawals or transfers per month. If you come across something you want to purchase for the holidays—whether that's the perfect gift or roundtrip airfare—you can tap your funds pretty easily. Certificates of deposit (CDs), 401(k)s and traditional IRAs are different. Pulling money from these accounts could trigger an early withdrawal penalty (and possibly a tax bill).

How to Open a High-Yield Savings Account

  1. Find the right high-yield savings account for you. Shop around and compare interest rates from different banks and credit unions. Online banks tend to offer the highest yields, but there are other things to consider. Are there any account fees or minimum balance requirements? What about access to ATMs and brick-and-mortar locations?
  2. Get your paperwork together. Check to see what documents you'll need to open the account. That will likely include two forms of government-issued photo identification, along with your contact information.
  3. Open and fund your account. Most financial institutions allow you to apply for a high-yield savings account online. While a credit check isn't required, they may pull your ChexSystems report. This bank reporting agency keeps track of your previous bank accounts. Your application might hit a roadblock if you have a history of unpaid bank fees or nonsufficient funds charges.

Once you're up and running, you'll likely have access to a mobile banking app. That can make it easy to keep track of your holiday spending and move money as needed.

Tips for Saving for Holiday Expenses

  • Account for all holiday costs. That includes gift-giving, traveling, food, entertaining, decorations, holiday events and more. How much do you reasonably expect to spend in each category?
  • Set a budget. A strong holiday budget can help you avoid taking on new debt. Once you've determined how much you want to save, take that amount and divide it by the number of months there are until the holidays—that way you can save little by little each month.
  • Take advantage of extra cash throughout the year. Work bonuses, tax refunds and money from side hustles can help pad your holiday fund.
  • Cut back on discretionary spending. If you only have a few months to save, you can temporarily rein in your flexible spending. That might mean putting boundaries around eating out or spending less on entertainment. Little sacrifices in the short term can help you get through the holidays without accumulating new debt.

The Bottom Line

A high-yield savings account may be the best place for your holiday fund. It's separate from your checking account and allows your cash to earn interest. You can also access your funds whenever you need them.

As you prepare for the holidays, don't forget to protect your financial health. Free credit monitoring with Experian will alert you to new activity on your credit report, which could help you spot potential identity fraud