Diversification is a word that seems to be bandied around a lot if you have accumulated some money.
It means that you should put your money into different places and asset classes to minimize the risk of losing it. This might sound easier said than done but it is not necessarily that complicated. If you want to know how to diversify your savings, read on.
A popular term that is used by financial advisors is larder/fridge/freezer. This relates to where you should put money and how long it should go away.
Your ‘larder’ money is your everyday spending money or bill-paying money. This needs to be kept within easy reach so that you can use it when you need to.
Your ‘fridge’ money is the money you need less frequently such as your Christmas spending money or your vacation savings. You can use an interest notice account that pays a higher interest rate or a savings account for this.
Your ‘freezer’ money is the money you can afford to put away for a long time such as your pension fund or money to buy a house or put your kids through college. There are several types of investments that you can use to save for the long-term, but they are usually categorized into low, medium, and high-risk savings.
Low-risk savings sound like a fantastic idea until you realize that these pay the lowest interest rates, and you may be subject to inflation risk if you put too much of your money here. Putting some of your money into low-risk savings will help you to diversify your portfolio and it means that you are less likely to lose this money. Low risk includes bank accounts and government bonds.
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You may decide to take some risk on some of your savings because it might make the interest rates more favorable. You should expect to invest your money for around 3-5 years if you want to start making better returns on your investment.
You should remember that markets can fluctuate, and you could lose some of your money if you realize your investment at the wrong time. A financial advisor will be able to let you know when to cash in these funds. These investments could include company shares and stocks.
A high-risk investment could put you at more risk of losing some or all of your money if the investment fails. These investments could include buying into a start-up business you hope will succeed or buying cryptocurrency which you can easily do through a company such as Cryptology.
The upside to this type of investment is that the returns on your capital could be huge. Many entrepreneurs favor these types of investments because they could make a lot of money.
Ideally, you should spread your saving across the board and place some money in each of these categories if you want to diversify your savings and minimize your risk.