Compound Wisdom

There is a difference between a money market deposit account and a money market mutual fund. The deposit account is an interest-earning savings account offered by an FDIC-insured financial institution with limited transaction privileges. The interest rate paid on such an account is usually higher (but not always) than that of a regular savings account.

A money market mutual fund is not federally insured. When you invest in these types of funds, your principal is not guaranteed. But the risk of losing money is extremely low. Money market mutual funds usually invest in Treasury bills, bank CDs and highly rated corporate bonds. Usually this account will pay a higher rate than a money market deposit account will. Shop around for the best rates ( http://www.bankrate.com/ is a good source), and be mindful of fees you may be charged.

I loved this question from a 22-year-old student who is already investing:

"I've read that a lot of financial experts suggest investing in the S&P 500," the student wrote, referring to the Standard & Poor's index of 500 large publicly held companies. "Since I have a long time until retirement, wouldn't it make more sense to invest in a small-cap fund since they tend to get a few percent more per year? Why wouldn't more long-term investors want to put all their money into something with the potential for a larger return?"

A small-cap mutual fund is made up of shares in small companies. Yes, a small-cap fund has the potential to return big gains because you're investing in companies with the potential for great growth. But just like any sector, it can and does tank.

When it comes to investing, there is a key word that all investors -- not just young ones -- need to sear into their minds: diversification.

Here's a good definition from Investopedia.com (another good source of investing information): "Diversification is a technique that reduces risk by allocating investments among various financial instruments (stocks, bonds), industries and other categories. It aims to maximize return by investing into different areas that would each react differently to the same event."

You should diversify because to do otherwise isn't investing; it's gambling.

The following, unfortunately, is a question I get far too often. The numbers change, but the bottom-line situation is the same: "I am 23 and I have $2,000 in credit card debt and $100 in savings. I want to get rid of that $2,000 debt and start saving. What is reasonable for a girl like me to have saved?"

You should have at a minimum of three months' living expenses saved up -- even if you're in college. That means having enough emergency money to cover your bills and expenses for three months.

It's wise to save even if you have debt; that way you can avoid adding to your debt when a financial emergency happens -- and it will.

You know what? When it comes to your money, don't wait for experience to be your best teacher. You can lose a lot of money that way.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.