The Importance of Saving and How Much To Set Aside
If more money comes in every month than goes out, congratulations -- you're saving. If not, head over to the credit and loans section . If you're not sure, take another look at the budgeting section.
How much should you build up and set aside? Experts recommend that you build up at least three to six months' worth of living expenses. The right amount for you will depend on the following:
- What are your financial responsibilities? If you're the head of a household, or have dependents or anyone else who relies on your income, you'll want a larger cushion.
- How willing are you to take risk? If you're risk-averse, you'll want a larger cushion.
- What expenses do you anticipate having in the coming few years? If they're higher than usual, you'll want a larger cushion.
- How regular is your income? If you are self-employed, work on commission, or otherwise have income that fluctuates, you'll want a larger cushion.
As you build up your emergency fund, and even once you've finished building it, the money should remain in a safe place. Any money beyond this cushion that won't be needed for several years can go toward higher-risk, higher-reward investments such as stocks, but this emergency fund should not be placed at risk. Since you will want to be able to access the money on a moment's notice, keep it in a money market account or money market mutual fund.