To put your short-term savings into context, think of your finances as a wedding cake. The bottom layer is your long-term savings. The goal is to compound that long-term money into a wide, deep foundation for your finances. Ideally, it will eventually be the biggest piece of your cake, broad enough to support a long and active retirement. Stocks of solid, long-term growing companies are ideal for this -- think of firms like Wal-Mart (NYSE: WMT ) , Home Depot (NYSE: HD ) , Costco (Nasdaq: COST ) , and PepsiCo (NYSE: PEP ) . Since it's the bottom of the cake, it is the least accessible. Leave it alone until the proper time has come; otherwise, your cake will crumble.
If you don't think that firms like those above are that powerful, consider that shares of PepsiCo have advanced more than 5,500% in the past 20 years, turning $5,000 into more than $250,000. In the past 10 years, they have tripled in value. Wal-Mart, Home Depot, and Costco shares have more than quadrupled in the past decade.
Short-term savings first appear in the second tier of the cake. This is the big-ticket fund you plan to spend within about five years. It might be five years' worth of living expenses if you are already retired, a college fund if you have older kids, or a house down payment. This is also where you stash money earmarked for the new roof, new car, or even a major vacation. CDs or short-term bonds can be used for these predictable expenses. Being the middle tier, it should be accessible sooner than the stuff in the bottom layer, but not until the proper time.
The top tier of the cake is your rainy-day fund, your peace-of-mind money. It's there for medical emergencies, car-repair emergencies, pink-slip emergencies. Think of it as the credit-card-avoidance fund, if you like. This money needs to be readily available -- but not too readily available, if you know what we mean. A money market account with check-writing privileges would be a good place to keep it, but your everyday checking account probably would not. You don't want to start thinking that a trip to Cancun is an emergency.
If you've got short-term money to invest, learn how to make the most of it in our Savings Center (which offers Fools some special deals on interest rates). And you can learn all about brokerages and find one that's right for you in our Broker Center.
And by the way, if you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service we're offering, featuring customized independent advice from a variety of objective financial experts. They can help you make sure you're saving enough and well enough to meet all your needs.
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