How to diversify your cash savings

Diversification is a tactic where you spread your money across different asset classes, such as bonds, stocks, real estate, and cash.

The goal of diversification is that by spreading out all your investment “eggs” into different baskets, your entire portfolio won’t be impacted if a downturn occurs in one part of the economy, or a certain industry or company.

Diversification also lets you take advantage of the tendency for some investments to do better while others lag, and vice versa, through various economic cycles.

You may already be practicing diversification by investing in mutual funds and ETFs across your portfolio, or in your retirement accounts, like an IRA or 401(K).

By holding shares of such investment products, you also own shares of stocks and bonds, which may fluctuate in value when markets are volatile. So, it makes sense to diversify your holdings for an appropriate risk tolerance for your short and long-term investment goals.

But these aren’t the only types of assets that can be diversified.

In fact, you can also diversify your cash across traditional savings products to take advantage of interest-earning potential.

Deposit accounts, such as high-yield savings accounts and certificates of deposit, are good savings options for money you don’t want to gamble with in the financial markets.

While most stock and bond investments do come with risks, savings vehicles are generally considered safer. And, many can give you the benefit of earning interest on your savings, without the risk of losing your hard-earned cash.

Not all cash savings accounts pay the same interest rates, so pay attention to the total Annual Percentage Yield (APY) before you allocate your savings.

Before you do so, you’ll want to get a clear picture of the types of popular savings accounts. Although savings vehicles are generally considered liquid, some are more so than others.

High-yield savings accounts: These accounts often offer annual percentage yields significantly higher than the national average. Interest rates on high-yield savings accounts fluctuate, just as they do with traditional savings accounts, depending on market conditions. High-yield savings accounts give you the greatest flexibility to deposit or withdraw your money at any time.

Similar to high-yield savings accounts, money market accounts can also help grow your savings with higher interest rates.

Fixed-term CDs: A fixed-term CD, also known as a traditional CD, is a type of savings vehicle where you typically deposit a lump sum for a specified period of time. These accounts allow you to lock in a competitive interest rate for a fixed period, which can help you better manage your return expectations.

When you save money in a traditional CD, you agree to put those funds aside for a certain period of time, ranging from a few months to several years. Usually, the longer the term, the higher the interest rate. While traditional CDs tend to offer more competitive interest rates than savings accounts, you’ll be charged penalty fees if you withdraw your money early, before the end of the fixed term.

No-penalty CDs: These savings products work in the same manner as traditional CDs, but you have the benefit of being able to withdraw your money before the CD matures, without penalty. But this added flexibility means you will typically receive a lower interest rate than those offered by traditional CDs.

Now that you know the differences among high-yield savings products, it’s time to diversify by using a combination of savings vehicles to maximize your ability to earn interest.

Rather than throw all of your money into an account with the highest interest rate, you want to make sure your savings vehicles are best-suited for your financial needs.

For example, you should ensure that any money you may need in a hurry is quickly and easily accessible. High-yield savings accounts are the most liquid type of savings because you can remove the funds at any time, usually within a matter of days or even hours. These accounts are especially beneficial for emergency funds or money you’ll need access to for an upcoming expense.

Once you have enough in savings for your immediate or short-term needs, you can focus on savings that could earn you more interest for the future.

For instance, if you’re saving money for a goal that will take place several years down the road, a CD may be a great option. To receive the maximum interest-earning potential, you’ll want to keep the money in the account until it meets its maturity date, because what good is earning a higher interest rate, only to be penalized for early withdrawal?

One technique that can help you take advantage of high interest is called CD laddering. With a CD ladder, you spread cash equally across multiple CDs to capture the higher rates of longer-term vehicles, while keeping portions of that money in shorter-term accounts, so not all assets are locked up for years.

It also decreases the risk of locking in a low CD rate if interest rates rise during your term. Remember, CDs offer fixed rates, so while this is beneficial when rates decrease, it could also mean you’ll miss out on higher interest if savings rates increase before you can remove your money.

Here’s a look at how CD laddering works:

If you had $30,000 to save, you would spread out your money between three different CD accounts.

• $10,000 in a one-year CD
• $10,000 in a two-year CD
• $10,000 in a three-year CD

When the first CD matures after one year, you can cash out or choose to reinvest it into another three-year CD that offers a higher rate than a one-year CD. Each of the other CDs you opened will then be one year closer to their maturity dates.

The idea of CD laddering is to continue replacing each maturing CD with a CD rung that is farthest away. In this example, that would mean adding a new three-year CD each time an existing CD matures.

Of course, you can also choose to move, or rebalance, the money as it matures to other savings or investments vehicles, depending on your needs at the time.

After you’ve made your savings decision and put your money to work, it’s important to rebalance regularly. Just as you would rebalance an investment portfolio by buying and selling investments as needed, rebalancing your cash savings can work in the same way.

Let’s say you want to hold half your cash in a savings account and half in CDs. After some time passes, you may have more of your savings held in CDs because they typically pay a higher interest rate and you may have had to withdraw some funds from your high-yield savings account. So, once your CD has matured, you can shift some of the money or interest earned from the CD into your savings account. This can help ensure you always have enough cash that you can access quickly.

You can also speak to a savings or investment professional about rebalancing strategies. Many banking platforms today can also help you monitor your savings so you know when rebalancing should occur.

Constantly opening new bank accounts to capture the highest savings or CD rates can be complicated and time-consuming. And if you choose multiple banks, that means multiple accounts, log ins, and balances to remember and review.

Raisin lets you put your cash to work by giving you access to an exclusive network of banks and savings products, including high-yield savings accounts and CDs — all from one, unified login.

Best of all, with Raisin you don’t have to worry about fees eating into your savings — we never charge fees for you to save with us.

If you’re ready to make the most of your hard-earned money, without the hassle of multiple accounts, then get started with Raisin today.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.