Diversify Your Net Worth For Stability
For as long back as I can remember, "diversify" has been a buzzword everywhere and it related to everything and nothing in particular at the same time. Diversify your wardrobe with this one neat trick! Diversify your career! Diversify your friends! Diversify America! Diversify your finances! Whew, diversifying things is a common denominator in many advertising campaigns and it sounds pretty sweet.
But wait, what the heck does it actually mean? And no I am not going to link to the Webster dictionary site. I am just going to make something up off the top of my head:
Diversify: To make more diverse.
Well thanks Dave you really are the greatest you know that right? Good.
Let's rathole straight into the aspects of financial diversification and the different types of diversity you may very well want to increase. Generally speaking, by applying diversity to your financial holdings, you will experience various advantages and few disadvantages. This can be done at different levels ie your net worth as a whole, or your stock holdings, or even just a checking account that is separate from a savings account. Let's focus on the major one.
Diversifying your net worth
-This is the cornerstone of all portfolios. Without multiple accounts and multiple holdings, you do not have a portfolio of any kind, you just have an account-
This is fine for beginners only. Right after you graduate college it may be allowable for you to spend a few months or a year with just one checking account to get into the swing of things. If you are like most fully employed recent college grads, you will save money the first year out of school because you are still spending money on a college student level, but making money on a semi-adult level. After a certain amount of time you will have a checking account which could easily cover 6 months of your expenses, and you should migrate that level of wealth into a savings account. You have already begun a long journey which will end with everything being alright and you being able to take vacations without sweating too much.
More importantly, you have begun to diversify! With the first step of creating 2 accounts from one, you have already gained the following advantages:
- You are vastly more protected from fraud or theft because your safety net stays isolated and not in the same pool as your checking.
- You are unlikely to withdrawal from your safety net because you mainly pay attention to the balance in the checking account on a monthly basis.
Within the next few years you will likely have slowed your savings rate by buying a better car and maybe not living in a ghetto and sharing a house with 4 people. This is a natural part of life, enjoy it while it lasts! Soon you will expect to have your own place and expect for your car to run, which is a far cry from the college days when you were just happy to have gas and some Ramen noodles. But again, even with these increased spending habits you should still be saving a decent amount of money. What do you do with it?
- Invest in the stock market
- Invest in real estate
- Start a business (not likely)
Let's be real here: starting a business is hard and it is not usually on many people's list first thing out of college. I know I am negging the American dream here, but being a sole proprietor of a business straight out of college is not for everyone. It's stressful, it's hard, it requires you to risk years of your future. Most financial blogs advocate separate income streams and I support that idea fully, but don't saddle yourself up with a business straight out of college unless you really feel like you got the time and money to burn, because it really isn't for everybody.
Instead, you should absolutely invest in stocks and real estate. Or maybe both. Make your main input into a stock/bond account every month, then when you have enough money in there to buy property, go for it!
There are numerous advantages to owning your primary residence, besides it accumulating value and equity over the years, it also gives you an interest deduction on your taxes which is nothing to scoff at. Stock market investments will do no such thing. I realize that carrying debt for the purpose of lowering your taxes seems foolish in and of itself, and it would be a really dumb thing to do if that were the only aspect of holding debt. But in this instance, the money you are spending is split into a few categories such as interest payments (deductible), Principle payments (equity), taxes (deductible), and insurance (deductible on rentals only.) The alternative for normal people is that they would have to pay rent, which is not deductible in any sense, and it is also dependent on the housing market at any given time. By the way, this market has historically moved very far up while it has moved to the right, so the trends should not be ignored if you are a price taker.
Just a few years after college you should be able to have attained a normally diversified portfolio which will insulate you from bad things happening. I will list a few life events where you will fare better with a diversified portfolio as opposed to a "just whatever" portfolio:
- Your house floods or is burned down: That's why you have insurance for your primary residence! This is a requirement if you are paying off a mortgage by the way. If you were renting you likely wouldn't get squat, at least without a lawyer.
- You lose your job: You have six months of expenses saved up. You also have unemployment benefits if you have a normal job. You also have real estate you can liquidate or rent. You also have stocks if you really want to tap into them. You can move to a cheaper area if you really can't find anything. So many options to buy time between income streams. By the way if you can't find a job in 6 months then you really need more help than I would be able to give on a blog anyway.
- Your girlfriend leaves you: Yeah, that will happen bro beans. Remember, it's her loss. And I have a feeling a diversified financial portfolio will make you feel more stable no matter what happens in your personal life. At least you have a Corvette right?
- You wreck your Corvette: Insurance will pay for it. You don't even have to wait for the check to buy another one you can totally borrow from your safety net for this type of expense, that's what it's for! And if you happen to hurt yourself I really hope your job gives you health insurance.
- Family comes into town: you don't have to ask the landlord if they can stay for a week, because that's you! Just give them the pullout couch and call it a day.
- Somebody gives you lip at work: You can give them lip right back if you want because you don't absolutely need this job to survive. And also you are a grown ass man and you don't take lip from no lippy ankle biting coworkers.
- Stock markets go down: You don't care because your stocks are in it for the long haul and you have a safety net so you don't need to liquidate when the market is low. What a great feeling it is to truly not care.
Overall, diversity in your finances should help you enjoy your life better. It's a hard system to build and it takes time, but if you set up good saving habits it should come easy enough. Live within your means. Work hard, party hard,