The Importance of Diversification.


As the old saying advises not to put all your eggs in one basket, it's particularly true of where and how you allocate your money. Diversifying how you allocate your money can help you address both shorter-term spending needs as well as longer-term financial goals. Another benefit of diversification is that it may help to minimize risk associated with fluctuations in the economy, while at the same time helping you aim for long-term financial growth.

Let's take a look at a number of financial vehicles across which you may want to consider spreading your money to meet varying financial needs.

Basic Savings Accounts

Basic savings accounts generally have a minimum opening amount requirement, as well as a monthly balance requirement. If the required monthly balance is not maintained, you'll likely have to pay a small monthly fee. While these accounts come with withdrawal limits, they offer easy access to your money, while also earning a small amount of interest.

Money Market Accounts

Money market accounts help you earn interest on your money at higher rates than basic savings. Like basic savings accounts, money market accounts come with transaction limits; however, these accounts often offer additional features, such as check writing and debit cards, but require higher minimum and opening balances than basic savings accounts.

Certificates of Deposit (CDs)

A CD is an ideal way to save money that isn't needed for immediate use. These accounts offer fixed interest rates that are higher than basic savings or money market accounts-but the money can't be withdrawn for a pre-determined period of time or you'll have to pay a penalty. Many banks offer a range of CD lengths, from a few months to a few years. Generally, the longer the term, the higher the interest rate will be.

Individual Retirement Accounts (IRAs)

It's never too early to begin planning for retirement, and an IRA can help you start saving for retirement. Even if you have access to a 401(k) or a pension through your employer, funding an IRA may still make sense, depending on your financial situation. There are two types of IRAs: traditional and Roth. Both types of IRAs carry different tax benefits, but these benefits phase out at certain income levels. If you withdraw money before the age of 59½, you may have to pay a penalty on top of any income tax payment. There are some penalty-free exceptions, including higher education, medical, or first-home bills.

401(k) and 401(a) [including 403(b) and 457(b)] Plans

Many employers offer these savings accounts to their employees as a way to allocate funds for their retirement. Employees' contributions to these funds are deducted from their paychecks before taxation and are sometimes proportionately matched by their employer. The type of defined-contribution plan available to a person depends on their employer-401(k) plans are offered by for-profit organizations, 403(b) plans are offered by non-profit institutions, and 457(b) plans are offered by government employers. Regardless of the employer plan, it's important to note that most investment vehicles available in these plans are not FDIC insured. While there are some exceptions, withdrawals from 401(k) and 401(a) plans taken before the age of 59½ are generally subject to federal tax and early distribution penalty fees.

529 Plans

If you have children already or plan on having children, 529 plans can help you set aside money for your children's college education with certain tax advantages. The money earned in 529 plans is not subject to taxes, as long as the withdrawals are used for expenses such as tuition and/or room and board. If the funds are used for ineligible expenses, the earnings are subject to a federal tax. There are two types of 529 plans-one is set up directly at a specified institution to fund future enrollment at that institution, while the second type places money in various investment vehicles for future use at any college. However, regardless of type, it's important to note that neither is FDIC insured, and funds allocated into either type of 529 plans are treated like parental assets and will affect the student's financial aid eligibility.

These are just some of the ways you can diversify how and where you allocate your money to meet your particular financial needs. We invite you to explore our website to learn about our products and how they can help you address both your short-term spending needs as well as your long-term financial goals.


The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person's situation is unique and may materially differ from the information provided herein.  You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made.  Popular Bank does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.