Using Deposit Accounts in Financial Planning
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Using Deposit Accounts in Financial Planning
Although deposit accounts may not in themselves be high-yield investments, they can play a very important role in your overall financial planning.
Things To Know
- Deposit accounts are ideal for putting away a little money at a time.
- Deposit accounts work well for short-term and low-risk needs.
- Deposit accounts may be ideal for emergency funds.
Accumulating funds for investing
To begin with, you will need to accumulate funds for investing. Many kinds of investment vehicles require minimum investments of thousands of dollars. Short of waiting for a windfall, the first step in your investment strategy may be to salt away a little at a time until you have the funds to invest. A deposit account offers a safe and ready way to do your salting. It can also be a good place to keep a supply of liquid cash on hand to take advantage of a "hot" investment opportunity.
Parking your cash between investments
Once you own an investment portfolio, deposit accounts can be a good temporary shelter for funds that are between investments. In the event of a bear market in stocks, for instance, you may need an account to transfer capital to where it can be safe and still earn some interest or dividends while you wait to make your next move.
Deposit accounts also serve as a good alternative for those with short-term needs and/or a low risk tolerance.
Use them for emergency funds
One rule of thumb is for a person to have three to six months’ worth of living expenses available for emergencies, such as temporary disability or unemployment or unforeseen large expenses. In addition, there are the expenses you are planning for in the next 12 months or so. Deposit accounts offer the surest way for your funds to be available. Investments such as stocks can be volatile, and other investments such as certificates of deposit may require you to pay early withdrawal penalties. The same issues apply to those who are very adverse to risk and volatility. Your capital may not earn as much in a deposit account as in other investment vehicles. However, it will make modest returns in a deposit account and will be there when you need it, leaving you no worry about its availability.
