When you think of diversifying your portfolio, you think about your approach to investing in a variety of stocks or mutual funds to spread your exposure to risk across multiple investments. Investing in one type of asset is risky. Diversification helps to reduce volatility.
Have you considered that the same can be said for your savings accounts?
There are many savings options available to you, and each has different features and benefits. When you spread your savings across a variety of financial products, you will better ensure that you meet your goals for the short and long term. You can achieve a level of growth, while keeping funds available, with a well-considered and diversified plan.
Some savings products are better for the long term and offer higher interest rates. Other products keep your money more liquid, allowing you access to funds in the short term. Some savings products even offer tax exemptions.
Accomplish your goals with savings
It’s a good idea to make a list of your short-term and long-term goals. Think about what you want to achieve and prioritize your goals. Saving is the act of preserving capital for later use. Funds will accumulate considerably over time if you’re committed to putting away money regularly. When you add a growth component to your savings, you can offset the effects of inflation. The amount of growth you achieve, or interest, is based on your tolerance for risk. Your approach to saving for the long term will look different than your approach to saving for the short term.
It’s a good idea to establish certain investment savings plans that are designed for some of life’s major milestones:
- College savings plan: Known as a 529 savings plan, these plans allow you to make contributions to a college education fund that is exempt from federal income tax.
- Retirement savings plan: IRAs and 401(k)s are long-term savings plans for retirement.
There are several other savings products available to you to help you achieve your short- and long-term goals or make funds available to you in the event you need to access them immediately.
- Savings accounts: Your credit union offers a standard savings account that keeps your funds separate from your everyday-use checking account. Savings accounts will typically yield an interest rate that is dependent on current market conditions. Your money is safe in a savings account as deposits are insured by the National Credit Union Administration. Your credit union may also offer a high-yield savings account, which requires you to make a minimum initial deposit and maintain a minimum account balance to qualify for the higher interest rate.
- Money market accounts: Your credit union offers money market accounts, which may have better, or competitive interest rates compared to a standard savings account. Your money is safe in a money market account as deposits are insured by the National Credit Union Administration. These accounts may require a higher initial deposit and a higher_minimum balance than high-yield savings accounts.
- You can access your money market funds quickly. If your financial institution offers it, you may be able to access your funds by writing a check or through the use of a debit card associated with your money market account. However, you are limited by Federal Reserve rules to six of these types of transactions each month. A money market account is an ideal savings account should you need to access your funds in the event of an emergency.
- Certificates of deposit: A CD is a type of fixed income security issued by your credit union and has a specific pre-determined maturity date that could range from a month to 5 years. The financial institution pays interest to the account holder; however, the rates are typically lower than bonds, but higher than a savings account. CDs are risk-averse and offer variable maturity dates.
- Interest rates: Changes in the market may dictate your savings strategy:
- When interest rates are rising, consider investing a higher percentage of your money in a shorter-term CD.
- If you anticipate lower interest rates, lock into a longer-term CD with a favorable interest rate.