How to Diversify Your Savings Plan
Published January 27, 2015 | Updated February 24, 2015
Get the Right Mix
Everyone’s financial landscape, life goals, and circumstances are different; therefore no two savings plans are exactly alike. A well-developed savings plan generally aligns the saver toward their life goals and may involve several different types of low and high yield savings vehicles, such as Savings Accounts, Money Market Accounts, and Certificates (also known as CDs or Share Certificates).
Diversification of a savings plan refers to the mix or blend of these different savings vehicles. The key to successfully diversifying your savings plan lies in finding the best mix between liquidity and earning the best return on your savings. Liquidity refers to how accessible your funds are. Generally speaking, high yield savings accounts tend to be less liquid than accounts that offer a lower rate.
Diversify Your Savings Plan According to Your Life Goals
Depending on where you are in your progress toward your life goals, you or your financial advisor will want to allocate your funds to these different account types appropriately. Consider these three scenarios and how the allocation of funds affects liquidity and earning potential.
Savings Plan 1 might be appropriate for someone who anticipates needing access to funds in the near future and on an ongoing basis. The majority of the funds are in a liquid Savings Account and short-term Certificates that are maturing and re-investing every 6 to 12 months. Meanwhile, a portion of the funds can remain in high yield savings accounts like Money Markets and long-term Certificates to maximize earning potential.
Savings Plan 2 would likely be an appropriate savings plan for someone who is more focused on growing their savings and not accessing it very often. The majority of the funds are tucked away in long-term Certificates and Money Market Accounts with higher rates, while a smaller amount is available in a liquid Savings Account just in case of emergency.
Savings Plan 3 more evenly spreads liquidity and earning potential by allocating half of the funds in Money Market Accounts and long-term Certificates while the other half is in short-term Certificates and Savings Accounts. This might be a good way to allocate your funds if you're more concerned about liquidity than earning the highest dividends.
There are an infinite number of ways to allocate the funds in your savings, but which is best for you? Only you and your financial advisor can make that decision. Taking the time to map out your savings and financial goals with a financial advisor and devising a savings plan to meet those goals will make all the difference in the world.
If you're concerned about your funds being locked away in a Certificate (CD) for too long, you may want to learn more about CD Laddering and How it Works.
Interested in earning better savings and share certificate dividends with Amplify?