Monday, June 23, 2008


Every consumer knows they should save money. Unfortunately, many can't afford to, and, even when they can, they often don't know how to prioritize those savings. Here’s how:

First, as we noted in a previous blog, everyone (no matter how affluent or modest their financial situation) should have an "emergency fund", an amount of money equal to 5-6 months of your monthly costs (7-9 months if you're self-employed), in a safe, liquid account (such as a saving account, or money market mutual fund);

Second, once you have an emergency fund, you can, if want or need to, save for "short -term" investments, such as buying a home. If you're conservative, this money should be kept in the same place as your emergency fund; if you want to be a little less conservative, some of this money can be invested in "balanced" mutual funds. (For a list of suggested balanced mutual funds, see the BestMoneyinfo Mutual Fund list – you can find that list by clicking on the
Best Money info icon on the home page.)

Third, for most people, the rest of your savings should go towards retirement. Your goal is to save 20% of your gross family income (15% if your job guarantees you a pension) each year towards retirement, in a well-diversified portfolio of mutual funds. (Of course, this is a goal that people should strive for, but many consumers will not be able to afford. If not, that doesn't mean, however, that you’re destined to be destitute in retirement. Moreover, if they have to start saving later in life, such is a perfect example of "better late than never".

Finally, we can’t stress the following enough: while it may seem harsh, parents need to recognize that, given the respective costs of retirement and college education today, they cannot afford to save for their children's college education (other than gifts given to and money earned by their kids) unless they (the parents) are saving 20% of their annual family income (15% if they’re guaranteed a pension) towards their retirement each year.