Should You Use a CD to Save for 2024 Holiday Costs?

Quick Answer

A certificate of deposit (CD) can be a great place to keep your holiday fund. It’s an interest-earning account that’s considered a safe investment. However, you’ll likely be penalized for early withdrawals.

A young man sitting on sofa in the living room on a winter day for Christmas.

The 2024 holiday season might feel like a long way off, but it's never too early to start saving. Putting money into a certificate of deposit (CD) can allow you to earn interest for close to a year—and grow your holiday fund with little effort. There are trade-offs to consider, but if done correctly, using a CD to save for holiday costs could be a smart financial move. Here's how to use this strategy to your advantage.

Is Using a CD to Save for Holiday Costs a Good Idea?

A CD is a type of savings account that typically requires you to give up access to your money for the length of a predetermined term. When the term ends, you'll get back your deposit plus interest. Withdrawing your funds before then typically results in an early withdrawal penalty, but CDs can make sense for money you don't plan on using right away.

If you're looking for ways to build your 2024 holiday fund, a short-term CD may be worth exploring. Opting for a three-month, six-month or nine-month maturity period gives your money time to grow before the holiday shopping season begins. CDs are also considered low-risk investments.

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Benefits of Using a CD for Holiday Costs

  • It's a simple way to boost your holiday savings. Annual percentage yields (APYs) vary, but as of December 2023, some nine-month CDs have rates as high as 5.75%. If you deposited $2,000 at that rate, you'd earn $115 in interest. That could go toward gifts or help reduce holiday travel costs.
  • Your investment is safe. CDs offered by banks are insured by the Federal Deposit Insurance Corp. (FDIC) for up to $250,000 per depositor, per insured account for each ownership category. Credit unions provide comparable coverage. Your holiday fund will likely be well below that threshold, so the chances of losing money with a CD are slim.
  • You might not be tempted to spend it. If your holiday fund is sitting in your checking or savings account, it can be easy to dip into it for impulse purchases or non-holiday expenses. Pulling money from a CD isn't as simple and will likely result in a fee. That could discourage you from touching it before the holidays roll around.

Drawbacks of Using a CD for Holiday Costs

  • You probably can't add to your savings. Most CDs do not allow you to make additional deposits. The exception is an add-on CD, but these aren't as common and extra deposits may be restricted. One workaround is to hold additional holiday money in a second CD with a different maturity term.
  • You won't have easy access to your money. If you encounter a financial emergency before the holidays, your CD funds will probably be locked in the account. Be sure you have cash savings on hand that's separate from your holiday fund. If not, you'll likely be penalized for making an early withdrawal.
  • Most CDs have minimum deposit requirements. CDs vary but most require an opening deposit that can range anywhere from $500 to $2,500 or more. You'll probably have to build up your holiday fund beforehand to benefit from a CD.

How to Use a CD to Save for 2024 Holiday Costs

  1. Decide how much you want to spend on the holidays. Looking back on the previous holiday season can help you estimate your spending. Account for gifts, holiday travel, decorations, entertaining and other holiday costs.
  2. Gather your initial CD deposit. Do you have enough cash to top off your holiday fund? Maybe that means pulling it from your savings and replenishing it over the next few months. Another option is to open a CD with a lesser amount to begin earning interest. You can then set aside more money in the coming months to open a second CD that will mature before the holidays.
  3. Research your options. CD rates, terms and opening deposits vary from one financial institution to the next. Comparing different banks and credit unions can help you find the right CD for you.
  4. Open and fund your CD. When you're ready to open a CD, you can apply online, in person or over the phone. You'll then receive a disclosure statement that explains more about how the CD works.

Other Holiday Savings Tips

Cut Down on Discretionary Spending

Whether you use a CD to save for holiday expenses or not, reducing your spending can free up money in your monthly budget. You might bring down your expenses by:

  • Canceling memberships and subscriptions you don't need
  • Revisiting your cellphone plan
  • Meal planning and cutting back on take-out orders
  • Refinancing debt
  • Carpooling or using public transportation
  • Negotiating lower interest rates on your credit cards

Open a High-Yield Savings Account

High-yield savings accounts offer higher yields than standard accounts. Some currently have APYs up to 5.40%. You might get a slightly better return with a CD, but liquidity won't be an issue. One downside of high-yield savings accounts is that free electronic transfers and withdrawals may be limited.

Pick Up a Side Gig

Having extra income at your disposal can make it easier to save for the next holiday season. Side gigs come in all shapes and sizes, but here are some to consider:

  • Babysitting or pet-sitting services
  • Tutoring
  • Teaching English
  • Freelancing
  • Driving for a ride-hailing service
  • Selling things online

The Bottom Line

A CD can be a great place to keep some or all of your holiday fund. You could earn a higher-than-average interest rate that ultimately boosts your savings. Just make sure you'll have access to your money when you need it. Choosing the right term length can help prevent early withdrawals.

Planning ahead is a simple way to avoid holiday debt. It goes hand in hand with free credit monitoring with Experian—both can help strengthen your financial health.