Savings

Emergency Fund
The first and most important savings goal should be an emergency fund. No matter how stable you think your job may be, recent history has proven that many of us are not safe from corporate downsizings. Other financial burdons (emergency medical bills, uninsured property damage, etc.) may also occur when you least expect it. These unexpected life events can be traumatic, but being financially prepared can keep the situation from becoming devastating; giving you time to regroup and plan your next move.

Financial advisers typically recommend saving the equivalent of 3 to 6 months salary in a low-risk, readily accessible account - such as a regular savings or money market account. It is important to only touch this account when absolutely necessary, and to replenish it as soon as possible.

A relatively painless method that I use for funding my emergency fund is to have a small portion of my paycheck direct deposited into a separate savings account. I've been doing this for so long that I sometimes forget about it. However, in the back of my mind I know that I have the funds available for any financial emergency that may occur. With regular contributions combined with compounding interest, it's amazing how quickly your fund can grow.

Short-Term Goals
Short-term savings goals are generally considered those that will be used for purchases in the next 12-36 months. Common short-term goals include: a christmas fund, larger household items, the downpayment for a new home or automobile, or an upcoming vacation.

Because these goals typically require quick funding, a good practice might be to allocate 55% to 65% of your available monthly savings to a short-term goals. These funds should be held in a savings or money market account used solely for short-term savings.

Long-Term Goals
Long-term savings will be used to meet the goals of the larger expenses in your lifetime. These goals typically include educational expenses and retirement. Retirement is a critical long-term savings goal and is covered in detail on the Retirement page.

Long-term savings goals will call for different types of investing strategies dependent upon timing. For example, you might consider more aggressive growth (stock) investments for the first half of the savings period. As you get closer to the end of the savings period, you'll probably want to switch to more conservative (less risky) investments to ensure the money is there when you need it.

Savings Calculator
Use this Savings Calculator to see the effects of compounding interest.