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Posted by Jessica Ozar (MONEY FORUMS: 2, Answers: 18)
Asked on October 28, 2015 11:47 am
Short-term, savings and long-term, stock market. What I do personally is I keep enough in savings to cover myself for 6 months. Everything else gets dumped into the stock market via dollar-cost-averaging. If you want more than 6 months, go right ahead. It's more important to think about the act of saving money rather than the act of investing. So even if you don't invest right away, you will have still climbed the biggest challenge: setting money aside. Congrats on just asking the question. That's most of the battle. You have cool people like us to give you answers. ;)
Hi Jessica! My thinking is along the lines of what Beth posted. For savings - money you could need in the next 12 months - the funds should be in a stable, low risk account, such as a savings account or money market account. Due to the short time horizon it is not worth the risk of not having all of the funds available when you need them. Past a 12 month horizon I would break it into two categories, funds earmarked to be spent in the next five years, and funds to be used further than five years out. For the less than five year category some risk, through investing in conservative market-based investments, can potentially produce a greater return. For funds earmarked for a goal longer than five years out I would be invested into the stock market to the degree that you are comfortable with risk. Ideally there should be investment in each of the three categories, short-term funds for emergency or opportunity invested in stable account, mid-term funds with some market exposure in order to take advantage of potentially higher returns, and long-term funds, allocated for growth in the market in line with your risk tolerance. To build the funds I recommend starting with the short-term and moving out from there. Building savings provides you with a cushion which can help keep you from going backwards in an emergency. The mid-term bucket would typically be funds earmarked for future car replacement, a large vacation or trip, or even savings for a home purchase more than one year away. For these funds you would then move them into the short-term bucket when the goal becomes a year away. This reduces the risk of not having them available when you need them for the goal. The final bucket is for long-term goals such as retirement or a vacation home. Again, you would progress the funds into the nearer term buckets as you get close to the time you would anticipate using them.
Jessica, it depends on which category of saving you are talking about. Your emergency savings (6 months of living expenses) should be kept in something very liquid, like a savings account. Your longer-term savings can be invested in riskier investments that should, over the life of the investment, bring you a much higher return. For the majority of individuals, investing in the "stock market" should be simply investing in a market index mutual fund to take advantage of lower management fees, lower tax impact, ease of investing, and increased diversification (compared to picking individual stocks).