Money we have in bucket number one is for rather near term financial goals. Because of the short horizon to these goals, they should be invested in a safe manner. An example for shorter term goal would be planning a big overseas trip, or maybe some remodeling around the house.
The money allocated for these events can not really be put to the risk in the stock market, but can probably do more than sit in a savings account. Different opportunities here could be using a safe short term bond fund, or putting money inside a CD. While the short term bond funds can still fluctuate up and down, and run the risk of losing money, the risk is not very much because if invested properly these funds should not be making huge swings. The other option, putting money inside of CDs, is a much safer option, as you are guaranteed not not lose money, but will generally provide a bit of a smaller return. These CDs can also be FDIC insured, meaning they are backed by the US Government, to guarantee you will not lose the money you put into the CD.
Another piece of the first bucket is money stashed away for emergency use. Because while I frequently stress the importance of putting your money to work in financial markets, it is also extremely important to have emergency funds in the form of good ole cash savings. Emergency savings are there for when the unforeseen emergency happens. When the unexpected happens, we do not want to have to rely on the state of the stock market to be able to continue to fund our lives.
The big question about an emergency savings account, is how much should be in it? To this question, there is no exact answer. The amount is different for every person, and their unique situation. A general rule of thumb to throw out there for your emergency fund is 3-6 times your monthly expenses, but this is definitely not an exact formula.
If you are single and living on your own, your financial responsibility is much different than a whole family with a spouse and kids to support. Another important evaluation is the difference between monthly expenses that are necessities and those that are extras. When times get tough, we may be able to cut out a lot of the extras, but the true necessities are not going anywhere. Having a solid emergency savings allows you to fund the unexpected, without having to end up with loans or credit card debt as a result. Compounding an emergency with additional debt load is just drawing you further away from other financial goals.
An emergency savings fund is extremely important ; however, they remain different for each individual. Because of this importance, you should be thoroughly honest with yourself and know your situation, taking into account your job security and knowing your industry.
Ultimately, your emergency savings should remain around a level that makes you comfortable. An individual’s comfort level with their financial position is what is most important. People generally have a good idea of around what number they like to see in their savings account. When the savings pile up to a higher level, the conversation turns to putting some of that money to work in the financial markets. Conversely, when the savings start to creep down to more uncomfortable levels, we talk about creating a strategy to build that number backup, without losing sight of your other financial goals.
If you or someone you know would like to review their where they stand in relation to their bucket number 1, please do not hesitate to reach out. My email is firstname.lastname@example.org and I would enjoy chatting about this topic.
*This is the second article in a multi-part series. The first article can be found here.