Orderly Savings

Depending upon your circumstances and everyone’s is different, the order that you prioritize for investing may vary. However, in general most people should prioritize investing for the short-term and then the long-term. Short-term investing, which I prefer to call savings, is most commonly for an emergency fund. An emergency fund is basically a small accumulation of money to pay insurance deductibles and co-pays plus other small, unbudgeted expenses like a hot water heater replacement or new tires. An emergency fund should also be available as a replacement income during a time of unemployment. Most experts recommend having three to six months of expenses in an emergency fund. For many this may be the same as three to six months of income, but the distinction should be drawn here between income and expenses. To help evaluate how much you might need, look at the job market for your career. What you need to ask yourself is, “How long would it take me to find a replacement position to earn my current income?” Only you can be the judge, but that’s why three to six months is used as a rough guide. Statistically, the higher your income and the more specialized your field, the harder it is to replace your income. Some may want to plan for unemployment lasting more than six months.

Short-term savings may also include putting back extra for large purchases such as a large appliance, automobile, or vacation home. Though you may use similar instruments to help the money grow, be sure to keep this money separate from your emergency money. If you have the discipline to separate it through budgeting, you can use the same accounts, but this is difficult for most people. I recommend keeping separate accounts for your different short-term saving purposes. Obviously, it is difficult to save for your next car if you’re still paying on the old one, so debt elimination may be a factor in getting your short-term savings in place. Most would suggest getting a small emergency fund first, followed by debt elimination other than your home, followed by the rest of your short-term savings accumulation.

The objective of your savings instrument should be to outpace inflation while maintaining relatively stable principle values and high liquidity. We usually recommend a combination of a checking account, money market, and certificate of deposit for our clients. Each of these allows for good principle stability, but with varying degrees of return and liquidity. Having the least necessary in the most liquid investments is often the most advisable, but again only you can be the judge of what you will need access to.

In conclusion, the distinction between saving and investing is important. If you are merely “loaning” money with savings and not investing money, your assets will not truly “grow” in spending power. In fact, if you don’t keep up with inflation, the value of your money can go down even if the amount grows! Inflation is a real risk that should be considered for longer-term investing, so investment vehicles used for savings and investing should differ greatly for most people and businesses.