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Why Do I Need to
Save?
Everyone needs some short-term savings.
In fact most people need more then they think, stashed somewhere safe
and easily accessible. By "short-term savings," we mean the money you
will need for emergencies and for big expenses you will incur over the
next three to seven years, depending on your tolerance for risk, volatility,
and a market-induced change of plans.
In this short-term savings area of Raising a Millionaire, we will talk
about places to put the money you need at-the-ready -- checking accounts,
saving accounts, money market accounts, certificates of deposit, money
market funds, and short-term bonds -- and the pros and cons of each investment.
We will help you figure out how much you may need and the circumstances
under which each type of savings may be right for some portion of your
more liquid assets.
When we say "liquid assets," think of "liquidity" as the ability to be
quickly and easily poured from one vessel to another with little loss.
Cash is the ultimate in liquidity. It is welcome everywhere, there are
no costs associated with using it, and it is always worth exactly what
you think it is worth. By contrast, real estate is not very liquid. It
takes a long time to convert it into a readily transferable form, and
you tend to "spill" quite a bit -- a whole bucket load of commissions
and closing costs. In between cash and real estate is a range of investments,
with varying levels of liquidity.
What could happen if you don't have short-term savings? One of two very
unfortunate things:
- Emergencies or even should-have-been-foreseen expenses will spring
a credit card trap on you that can take years to escape from. It is
financially superior to have the money you will need soon safely accruing
interest, instead of charging that home repair or honeymoon and paying
double-digit interest rates on it for years.
- To cover a sudden (or not-so-sudden) expense, you may have to sell
assets, such as stocks, that were intended to cover long-term goals.
Consider this all-too-likely scenario: You put all your spare money
in the stock market and suddenly you need $2,000 for car repairs.
Unfortunately, this happens during a time when the market is down,
and you have to sell your stocks at a loss. Plus, that money is no
longer invested, so you will miss out on future growth.
Though your short-term savings will never rival returns on stocks over
the long term, we certainly think that short-term money needs to earn
its keep, countering inflation and maybe earning a little more. You have
got several options on where to keep your short-term stash. However, first
you need to do a bit of financial self-reflection to determine how much
short-term savings you need and when you will need it.
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