Balancing your deposit and investment accounts is a key aspect of managing your finances. It involves finding the right mix of saving, spending, and investing to achieve your goals and minimize your risks. In this article, we will explore some factors and strategies that can help you balance your deposit and investment accounts.
Before you can balance your deposit and investment accounts, you need to have a clear idea of what you want to accomplish with your money. Do you have short-term or long-term goals? How much risk are you willing to take? What are your income and expenses? These questions can help you determine how much you need to save, spend, and invest, and what kind of accounts suit your needs.
When I started out, I figured out my fixed expense, broke up accounts to pay for each of those each month, and took the promotions for setting up an account. Then I set my direct deposit to round up to the next $50 or $100, so that account slowly grew each month. What was left was my variable expenses which I was set up way better to manage. As I got raises I added to one of those accounts based on goals, funded investments, paid more towards debts, and/or raised 401k withholdings. I used tools within one of the banks to link the account balances and transactions so I could categorize and manage those across accounts.
When it comes to investing, I would not invest any money I would need within 5-10 years. If we learned anything with the markets is that they are unpredictable. I would stick to high yield savings while the interest rates are high. Anything long term in an investment account. I like to periodically review my expenses to see where the money is going. I keep fixed expenses from savings by using different banks and use my credit cards for points on the variables such as gas, groceries and misc while making sure that we can pay the card on a weekly or monthly basis. I save up for property taxes and annual fees in a high yield savings while taking advantage of interest free credit to pay for those items and get cash back.
Deposit accounts are accounts that hold your money in a bank or a credit union, and usually offer interest, security, and liquidity. Some common types of deposit accounts are checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). Each type of account has different features, benefits, and drawbacks, so you need to compare them carefully and choose the ones that match your objectives. For example, if you need easy access to your money, you might prefer a checking or a savings account. If you want to earn higher interest, you might opt for a money market account or a CD.
Investment accounts are accounts that allow you to buy and sell various assets, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Unlike deposit accounts, investment accounts do not guarantee interest, security, or liquidity, but they offer the potential for higher returns and diversification. Some common types of investment accounts are brokerage accounts, retirement accounts, and education savings accounts. Each type of account has different rules, tax implications, and fees, so you need to research them thoroughly and choose the ones that fit your objectives. For example, if you want to save for retirement, you might consider a 401(k) or an IRA. If you want to save for education, you might look into a 529 plan or a Coverdell ESA.
Need all of the money in less than five years? Don't invest it, stick to savings. Don't need the money for at least five years or preferably a minimum of 10 years? Invest it with index funds being your default option unless you put in a lot of extra work finding something better. Always maintain an easily-accessible emergency fund before locking anything away.
Diversification is the practice of spreading your money across different types of assets, sectors, and markets to reduce your exposure to any single risk factor. Diversification can help you balance your deposit and investment accounts by smoothing out the fluctuations in your returns and protecting you from major losses. To diversify your portfolio, you need to consider your risk tolerance, time horizon, and asset allocation. Risk tolerance is how much risk you are comfortable with. Time horizon is how long you plan to hold your investments. Asset allocation is how you divide your money among different asset classes, such as stocks, bonds, and cash.
In my experience diversifying your portfolio is really two-fold in the sense that you as well as the market will affect the choices. Diversification is very important however we need to be careful that we do not over diversify to the point of nullifying their objectives. When monitoring my performance, it is important to always have in mind what I am looking to achieve for that investment and how is it currently measuring up. Further to this even if it is not currently measuring up, I need to ask the question “Does it have the potential to if I had to leave it?” Understanding what your goal is and always reassessing according to the “Life Happens” principle. Finding the perfect balance is unique to ourselves with our unique circumstances.
Balancing your deposit and investment accounts is not a one-time event, but an ongoing process. You need to monitor your performance regularly and make adjustments as needed. You can use various tools and metrics to track your progress, such as statements, online platforms, apps, benchmarks, and ratios. You should also review your objectives periodically and make sure they are still relevant and realistic. If your circumstances or preferences change, you might need to rebalance your deposit and investment accounts accordingly.
Balancing your deposit and investment accounts can be challenging and complex, especially if you have multiple accounts, goals, and options. If you are not confident or experienced in managing your finances, you might benefit from seeking professional advice from a qualified financial planner, advisor, or coach. A professional can help you assess your situation, create a plan, select the best accounts, and implement your strategy. They can also provide you with education, guidance, and support along the way.
Start by: -Budgeting; understanding where your money is currently going -Build an Emergency Fund; should cover 3 to 6 months worth of “non-discretionary spending” -Save for Retirement; contribute to your pension/savings plan -Begin Investing; there are many ways to invest, seeking an expert’s advice always helps in strategizing your target -Automate your savings; 80/20 rule or 70/20/10 depending on your current circumstances -Pay down Debt; some require more immediate attention than others, so focus on the high interest debts monthly and in full