You know what they say: Don’t put all your eggs in one basket. That bit of wisdom applies not only to life in general but also to your savings deposits. And no, I don’t mean investment diversification, though that’s just as, if not more, important. We mean the deposit accounts where you keep your most liquid assets – cash, money markets, and CDs.
Diversifying your deposit accounts helps you make the most of your money by allocating your savings proportionately to each kind of deposit account based on how much cash you need at any given time. The cash you keep in the money market account will earn a higher yield than a regular savings account, while a CD account will probably gain a bit more than a money market account, but your funds won’t be quite as accessible.
Savings accounts hold the cash you need for daily life, such as groceries, utilities, mortgages, and entertainment. It is the most liquid form of your money and the safest way since it is cold hard cash. In theory, that is.
Silicon Valley Bank imploded in dramatic fashion recently, leaving many clients worried about their financial future. Fortunately, the federal government swiftly stepped in, guaranteeing all deposits would be returned to account holders – even those accounts that held more than FDIC insurance limits – while assuaging fears of nationwide ‘contamination.’
But you should never depend on the government! Consider having a few deposit accounts with different banks to reduce the chance of a sudden bankruptcy. Shop around for not only the highest savings yields but also trustworthiness and reliability, and only put in the FDIC insurance limit of $250,000 into one account type.
The FDIC will cover up to $250,000 per depositor, per account owner category. So, if you have two savings accounts with $300,000 in total, $50,000 of that won’t be insured. But, there are strategies to look into if you really like a specific bank.
A married couple can each have their own savings account with $250,000, plus a joint account with $500,000 ($250,000 each), and all deposits will be insured by the FDIC. Other account owner categories are IRA accounts and irrevocable trust accounts.
Next is money market accounts. These are essentially mutual funds that hold very safe and reliable short-term securities such as US Treasury securities, Municipality securities (munis), promissory notes, Repurchase Agreements (repos), and bankers’ acceptances. They fall between savings accounts and CDs regarding liquidity, safety, and yield. They pay a dividend and are highly liquid, meaning you can cash out quite quickly. Often, they require a higher minimum investment than a savings account and earn a higher yield.
CDs generally provide the highest APY of all the basic deposit accounts but the least liquidity. In fact, your funds may be locked up for a considerable amount of time. If you want to withdraw your funds, you will get hit with a penalty of either a set amount of the interest rate or a time period’s worth of interest earnings.
Banks and brokerages offer CDs with a maturity term of months to decades. The bank uses the money they receive from your CD to render loans to individuals or businesses or purchase their own investments.
There are two basic kinds of CD return rates – fixed and variable. Fixed-rate CDs provide a guaranteed rate of return throughout the maturity period. Variable-rate CDs offer the chance of higher yields should interest rates rise.
This strategy is reminiscent of the 3-Bucket retirement strategy but with a compressed timeline. In fact, it can easily be implemented into a customized retirement plan.
Diversifying your deposit accounts is an essential piece of the financial puzzle. It can help you weather life’s ups and downs and ensure that your money works as hard as you do. A Lakewood Ranch financial advisor can develop a tailored deposit strategy unique to your financial needs and goals. Click the button below!