The Savings Ladder:
The savings ladder is made up of several “rungs”. The first rung is the most liquid of the rungs and consists of “emergency” savings. This rung should be in a high-interest savings or money-market account. How much you ask?
There are several factors to consider when deciding how much your “emergency” savings should have in it. If the only people it will support are yourself, you can probably get away with 3 months of living expenses. Married? With children? The more dependants you have, the closer you need to be to 6-7 months of living expenses. Think of this savings as the “I lost my job” fund.
The next rung on the ladder is the mid to long range semi-liquid savings and investments. These are savings instruments that are tied up for a period of time, usually no longer than 3-5 years. Generally, these savings instruments include Certificates of Deposit, Bonds, Stocks, and Mutual Funds. Generally, all of these should be held for a period of time for maximum gain. In the case of CD’s and Bonds, there is usually a set period of time before they “mature” and, in most cases, significant penalties for early withdrawl. Because of the time restrictions these savings instruments usually have a higher rate of return than even the highest paying savings and money-market accounts.
The third and last rung (it’s a short ladder) consists of your extremely long-term savings and investments. The two most common forms of long-term savings are Real Estate and Retirement accounts. Your home and any rental property you may own is a long-term savings instrument. They either make you income or gain in value, or both.
Retirement accounts are becoming more and more important in the final step in any Savings Strategy. Whether you participate in your employers 401(k) or have an IRA, those accounts represent your retirement nest egg. The bigger those accounts get, the more likely you are to not have to work during retirement or even retire early.
Don’t expect to build a fully funded Savings Strategy Ladder immediatly. It wouldn’t be a ladder if it wasn’t meant to be taken one rung at at time. Start at the bottom and work your way up.