Saving: The First Step

We save money for three reasons:

• To meet emergencies. I recommend that people maintain liquid savings, which means that money is readily accessible in bank accounts or money market funds, to cover six months of basic living expenses
• To spend
• To invest

Saving is quite different from investing, although the two are often confused. We can save without investing, but we usually cannot invest without saving. Investing presumes that assets have a reasonable expectation of producing earnings or appreciating in value. I do not believe most passbook savings accounts or even many certificates of deposit that pay fixed interest meet this definition.

Your savings for emergencies and to invest should be, at a minimum, equal to 10 percent of your income — and it should be the first 10 percent of your income. Save first, spend later. Saving for other purposes, such as the new plasma TV or a vacation, should be in addition to the 10 percent for emergencies and investing. All money you take in should be subject to this 10 percent rule. If you get a gift or a windfall, such as an inheritance, at least 10 percent should go into long-term savings. If you get a raise, increase your savings to match.

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