How Much Money Should I Save Before Investing?
Balancing savings and investing is a difficult challenge. An individual should have insurance and savings to manage catastrophes and to pay for short-term goals. Saving between three to 12 months of net salary is a prudent level to strive for before embarking on investing in higher-risk financial products.
Individuals should have adequate money saved up in an emergency account before starting to invest. Emergency cash should total between three to 12 months of current income. These funds are needed for challenges such as an unexpected job loss. In addition, this cash reserve can ease large repair or medical bills not covered by insurance. Emergency funds are a great strategy to shield an individual from amassing large high-interest credit card debt.
Funds for Leisure Items
Saving for modestly expensive leisure purchases is important because it provides gratification while avoiding interest charges. The objective is to set aside savings to use for items or experiences that might be tempting to pay for using a credit card. For example, an individual could allocate monthly savings toward a dream vacation package or toward an exercise bike. This near-term, goal-oriented savings can help individuals avoid high finance charges associated with impulse purchases.
Savers should analyze financial instruments to match liquidity, a measure of the ease of withdrawing funds, with savings goals. In general, products with lower rates deliver more liquidity. Higher rate instruments have longer maturities, the time between depositing the funds and the date withdrawals are possible. Examples of savings instruments include savings accounts, certificates of deposit and U.S. Treasury Bills. Individuals should keep emergency cash in savings accounts, while CD's or T-Bills are good choices for saving for moderately expensive leisure items.
Warning: Delaying Investing Too Long
Having adequate savings is important, but so is long-term financial security. Once savings thresholds have been reached, individuals should immediately begin investing. Savings alone may not cover the cost of a long retirement. Investments, while riskier than savings, have more growth potential. The sooner an individual begins investing, the longer time there is for the securities to grow in value. This is important because many retirees will need to fund decades of living beyond traditional employment years.
Kevin O'Flynn began writing in 2008 with a background in private equity. He has written for MilitarySpot.com and lived and worked in the United Kingdom and Japan. O'Flynn holds a Master of Business Administration from Case Western Reserve University.