Remember when people used to save for future expenses like vacations and Christmas? Sears is bringing the Depression-era concept back with its own version of a Christmas club.
"While it's still sunny out, it's time to start thinking about a way to make sure Christmas is merry this year," said Susan Ehrlich, president of financial services at Sears. You can set up a Christmas club online or at most Sears stores. "We see people trying to spend more responsibly, and we wanted to help."
Financial planners say the concept's time has come — or come back, rather — in the wake of the still-lingering economic malaise.
Christmas clubs, first popularized during the Great Depression, were a way that frugal families could budget for costly events that loomed in the not-too-distant future. By putting money away in advance, savers were able to spend more freely and avoid the now too-familiar holiday debt hangover that can linger for months after the gifts are long forgotten.
Christmas club accounts have never been high return. In fact, they died out after banks started charging so many fees on the accounts that they became the plot of an episode of the 1940s radio program "Life of Riley" in which the show's hapless hero went to withdraw his Christmas club deposit, only to discover that he owed the bank more than he had saved.
Sears is trying to make the concept more attractive today by offering savers a 3% "bonus" on amounts saved before mid-November, which could make a club account a good deal for those certain to be spending prodigiously at Sears.
But planners say you don't need Sears to set up a similar account.
And, while it's easy to get distracted by the promised bonus, the real savings is in avoiding interest charges you would pay on a revolving credit account. Credit card issuers are now charging as much as 29.9% on revolving balances, so if a cardholder spent $1,000 next Christmas and let that balance linger on his credit card, it would cost him about $300 over the course of the year.
That makes saving in a dedicated account for Christmas an attractive idea, even though you'll earn only negligible returns on your deposits. And that's the case when you set up a small savings account at most banks and credit unions today. Some financial planners add that you shouldn't stop with Christmas savings.
"It's brilliant to save in advance for fun things like Christmas, vacations and even graduations," said Judi Martindale, a financial planner from San Luis Obispo. "Don't stop with Christmas. Think about setting up a 'fun' account that you could tap for any future goal. This could let you look forward to saving and allow you to spend without guilt — or debt."
Sears' Christmas club is basically a reloadable debit card that has no fees. Consumers can put as little as $5 on it at a time, Ehrlich said.
Sears will add the 3% bonus to account balances accumulated before Nov. 15. Since that's less than four months from the card's launch, Ehrlich notes that you'd have to earn 9% annually to get an equivalent return.
The catch? There are some restrictions to dissuade short-term profiteers, including one that says you'll get the 3% bonus only if you "activate" your card before Oct. 31, and the maximum bonus amount is $100.
In addition, you must spend the money you've saved at Sears or its units such as Kmart, Lands End, the Great Indoors and the shopping website mygofer.com, Ehrlich said.
On the bright side, there's no expiration date. So, your Christmas club savings could just as easily be spent on a washing machine or lawn mower in July as on holiday presents.
If you're not a Sears shopper you might want to create a Christmas savings account on your own. The best way to do that is to set up a savings account with a credit union or small community bank, said Bruce McClary, communications manager with Clearpoint Financial Solutions, a nonprofit credit counseling service. Credit unions typically offer slightly higher interest rates and lower fees than banks, making them ideal for low-balance accounts like these, he said.
"You can request that a certain amount of your paycheck be automatically placed in this separate account," McClary said. "Then you have the same amount deposited every month or every two weeks when you get paid."
The accounts won't make you rich. If you manage to save $1,000 and leave it in the account for a year, you might make $10 at today's paltry interest rates, experts said. But setting up a savings account can save you from paying interest — and could be an emergency fund.
"The bright side of the recession is that it really shook people up and made them think about how they were spending," Martindale said. "This trend of only spending money that you have is a very healthy thing."