How To Split Your Money Between Savings, CDs and More, According to Banking Experts
Written by
Cara Danielle Brown
Edited by
Zuri Anderson
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It’s crucial to balance your needs for liquidity, safety and growth. Unfortunately, most people lack the proper knowledge to strategically distribute funds across common banking products in a way that both helps them stay on top of their day-to-day expenses and ensures their savings earn the maximum amount of interest.
For this reason, GOBankingRates chat with banking experts to discover how individuals should split their money between checking, savings, CDs, treasury bills and more.
While the answers can depend on a variety of factors like risk profile, time horizon and individual goals, there is some generally accepted advice that can help the average person best allocate funds.
Checking Account
According to Melanie Musson, insurance and finance expert at Clearsurance.com, individuals should consistently keep a couple months’ worth of budgeted expenses in their checking account in order to pay bills. Because interest rates are low on checking accounts, it doesn’t make sense to keep much more money in checking accounts. After all, your money is just sitting and losing value to inflation.
High-Yield Savings Account
“You should have an emergency fund with three to six months’ worth of living expenses that is readily accessible and liquid,” stated Musson. “That emergency fund should be in a high-yield savings account [HYSA],” where it can earn higher interest than a standard savings account.
Certificates of Deposit (CDs)
Musson recommended keeping an additional three to six months’ worth of living expenses in a certificate of deposit (CD) ladder.
“You want your CDs to mature every three months, allowing you to periodically access the necessary funds without incurring penalties,” stated Musson.
CDs offer slightly higher interest rates than high-yield savings accounts but lock your money up for the term of the CD — so be careful to avoid putting money in a CD that you may need to access quickly. Musson stated that, if interest rates are similar on CDs to HYSAs, opt for the HYSA.
It’s worth noting that CD terms can range from three months to five years. CDs are typically for those with short time horizons since they are low risk and offer guaranteed returns.
Treasury Bills
As an alternative to CDs, Gates Little, CEO and president at altLINE by The Southern Bank Company, recommended short-term treasury bills which are very safe and backed by the U.S. government.
Their yields often aren’t as high as CDs, but they offer state tax advantages. And if you need to access funds prior to maturity, treasury bills can be sold on secondary markets without penalty.
Terms range from four to 52 weeks. A 24-week (six-month) treasury bill currently offers a 3.87% yield, per the Federal Reserve.
Mutual Funds and Index Funds
Musson recommended investing any additional savings into index or mutual funds which are comprised of stocks, bonds and other securities. While not as easily accessible, these options can be appropriate for those with higher risk profiles and longer time horizons (think ten years or more) since they offer greater potential for long-term gains but are subject to market volatility.
“Look at index funds that track the S&P or total market for equities and, if you’re getting closer to retirement, consider increasing the amount you invest in bonds,” stated Mike Kern, certified public accountant (CPA) and founder of FreeBudget.
The stock market typically delivers average annual returns of around 10% over the long-term.
Additional Banking Tips
Bree Shellito, director of financial well-being at Ent Credit Union, offered some additional banking tips to keep in mind when deciding where and how to allocate funds:
- Always compare rates across institutions to find the best ones.
- Choose banks with minimal to no fees.
- Review allocations annually or whenever your salary or goals change.
- Never invest in any banking or investment product you don’t understand.
- Clients with higher net worths should consider partnering with banks that offer extended FDIC coverage.
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