What Does “Diversifying” Your Money Mean?

Financial Advice By: Carmen Wong Ulrich

Q: When someone talks about “diversifying” their money, what exactly do they mean? I have always been told that I should be putting money into a savings account each month, but it seems like some people save their money in lots of different ways. What are some of the best ways to save money so that I have a secure financial future even after I get on in my years and retire?

We all know that diversity is good.  But in money-land, when someone talks about “diversification,” they’re usually talking about investing.  And investing, whether it’s in your home or the stock market, involves saving money that you won’t need for ten, fifteen or twenty or more years.  This is your long-term savings, such as funds for your retirement.

“Saving money” is a bucket term that actually applies to several different moves for your money.  Ask yourself: “What am I saving for?”  Your answer will determine how you save, where you save and how much you save.

For example, are you saving cash money for an emergency fund–the funds that will be there to pay bills if you lose income?  Are you saving maybe for a vacation once a year?   Or a “pop-up” fund to pay for unpredictable (“pop-up”) expenses like family graduations, births, car repairs, or other sometimes pricey events in your life?  If so, all this money belongs in a savings account or even two.  It’s money that should be held in cash.  Why?  Because these funds function like insurance—it’s there to protect your ability to write checks and not go into debt.  You can’t afford to lose that ability, so keep this money “liquid,” with easy access.

Next, are you saving for retirement or a goal that’s more than a decade away?  Investing this money, wisely, means exposing these savings to some risk (you can lose money, you can gain money) over a long period of time so that you can grow what you’re saving.  The key here is to make sure this is money you don’t need for a long time and that you know what tools are there for you to invest your money.  This takes some important studying, such as learning to understand your 401k, what index funds are and what you are paying in fees, etc.

To really wrap your mind around what you need to know, particularly for long-term savings and investing, speak to your 401k or retirement plan administrator, review the materials given to you and delve into resources online such as www.kiplingers.com for tips and education.  This kind of education is one of the biggest investments you can make for your future.  It’s saving!

Carmen Wong Ulrich is a personal finance expert and author of “The Real Cost of Living.”

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