Sufficient Savings

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Before allocating money for investing, your first and most important task is to ensure that you have amassed sufficient savings to see you through any emergency. An amount equal to three to six months' living expenses is the general rule. Setting aside this sum is absolutely essential, because once an investment is made, it should be left alone to work its magic and increase its value. Like checking a cake while it is baking, repeatedly withdrawing and redepositing stock investments will all but negate their progress.

In addition, this savings amount should be readily available. This means that you should be able to quickly get your hands on that money in cash. In the event of an emergency, time is rarely available to accommodate the paperwork or functions necessary to get your money out of the stock market. This statement is not meant to frighten you into thinking that getting your money out of the market is a long, laborious process ”because it isn't. However, getting your money may take a couple of days, or even several weeks, depending on the arrangements you make. In an emergency, you can't wait that long to get your cash; you need to be able to go to an ATM machine and get your hands on it immediately.

Plain English

Sufficient savings means the amount of readily accessible money or credit that you would need in case of an unforeseen emergency. This money, usually three to six months' worth of expenses, should be kept in an easily accessible account, and collecting it should precede any investments.

If you don't currently have sufficient savings for an emergency fund, forget about investing for right now. Your first priority is to amass your safety net by beginning to put away some amount into this fund regularly. In addition, any unexpected windfalls should also go di-rectly into this fund.

If you have not previously had a fund of this type, it may be tempting to use that money as it starts to grow. By raiding your fund, however, you are only further postponing the time when you will be able to invest. You must have sufficient savings before investing. The importance of this fund cannot be stressed enough. It is, without a doubt, more important than the ability to invest.

Amassing Your Emergency Fund

Having stressed the importance of sufficient savings, a couple of tricks may help you amass this amount a little more quickly. Instead of actually maintaining six months' worth of living expenses ”which to anyone would be a substantial amount ”remember that the purpose of this fund is to be able to deal with any emergency immediately. For that reason, available credit may be substituted for actual cash as long as the credit is backed up by other cash.

Thus, if you have, say, $10,000 in the fund, you may not necessarily want to keep all that money in a savings account. Let's say that you have a credit card with a $5,000 limit. You could invest $5,000 of the $10,000 in something that is absolutely safe, such as a CD (certificate of deposit) or money market fund. In case of emergency, the credit card would substitute for that $5,000 until you could get the cash out in a couple of days. Once you received the cash, you would apply it to whatever amount you had put on the credit card, paying off that debt. The advantage of this plan is that you haven't sacrificed your cash availability and at the same time your $5,000 has earned more than it would have sitting in a savings account.

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