Bankrate offers a list of the 10 commandments of personal finance that I'll be sharing with all of you as well as providing my thoughts on their selections. The commandment for today:
I. Thou shalt create a savings plan
He recommends you create a savings plan with 20 percent of your income. In fact, he helps his clients create a 24 percent solution. That means, they save 20 percent of their income and only spend 4 percent of their invested assets.
She suggests that a three- to six-month emergency fund should be established.
Hard to go wrong with these suggestions, though saving 20% of your income is a bit high for most people. I'm fine with 10% and hope for 15%, but 20% may be pushing it.
As for the emergency fund, I'm a big believer in having one. That way, when an emergency arises (and you know that one will -- you just don't know what it's going to be), you won't have to make a charge on your credit card that you'll need to pay off over several months (while incurring heavy interest charges.)
For related thoughts on this topic from Free Money Finance, see these posts:
Other than CD's and money markets, what do you suggest investing in if you still need that money to be fairly liquid?
For example, my wife and I are planning to quickly pay off our house. However, we plan on building our next home which means we'll need a pretty large downpayment. Thus, we may have 100k house loan left, but we'll have 100k in cash sitting around. Where should I put that money besides CD's and money markets?
Posted by: beastlike | January 23, 2008 at 03:36 PM
Beastlike --
Personally, I'd put it in moneuy markets and CDs.
Posted by: FMF | January 23, 2008 at 03:51 PM
FMF - Up to what amount would you then start to consider something else? 200k?
Ideally I would like to own a home that I planned on staying there or could stay there forever (no need to ever upgrade) and have about 50k in CD's/MM's. However, since I am basically saving for a large downpayment on that house, I'm just not sure I am making the right decision keeping a large amound of cash in investments only making inflation plus 1-2%.
Posted by: beastlike | January 23, 2008 at 04:00 PM
Are you willing to risk losing principal in the short term for a hope of gaining a couple percentage points in return? Personally, for something like saving for a house, I would stick with the 5% return in a money market and not have to worry about the risk of the stock/bond market.
Posted by: Kevin | January 23, 2008 at 04:09 PM
Beastlike --
There's nothing I can think of that will give you a better term and complete liquidity in the short term.
FWIW, I have my new house downpayment money in a money market. Yeah, I might not need it for another year. Then again, I might need it tomorrow.
Posted by: FMF | January 23, 2008 at 04:21 PM
Just a question about this saving say 10%, or 20% etc. Is this for saving for retirement? Or is this for a new car we might need or to make some sort of other investment or a new computer?
Posted by: Scott | January 23, 2008 at 04:35 PM
Sounds good.. Well, if anything, at least I am little more confident that I am making the right decision. Most likely our move is 3 to 5 years off, but if another baby pops up anytime soon, that can quickly change!
Thanks FMF/Kevin!
Posted by: beastlike | January 23, 2008 at 04:36 PM
Scott --
I'd say 10% for retirement (counting an employer match) plus any additional saving you may need.
Posted by: FMF | January 23, 2008 at 04:41 PM
Can't you use the 20% in savings as potential emergency fund? Not sure why I would want 2 different accounts for something that should only be used in case of an emergency.
Posted by: Jhonathan | January 23, 2008 at 05:18 PM
I would say 20% is the absolute minimum you should be saving. We save more like 50% and I think if you want to be financially prepared for the future you can't get away with anything less than 10% short term and 10% long term. But that's just me.
Posted by: LC | January 24, 2008 at 12:06 PM