The Motley Fool believes every American should be an investor. However, before an individual plops a dollar into the stock market, that individual should be rid of high-interest consumer debt, and have an emergency fund sitting in cold, liquid cash.
After reading such advice, though, a young Fool sent us an email:
Everyone tells me to have three to six months of my salary saved before I start investing. But in two years, I am not even close to saving more than one month's salary. What should I do? And where should I put my savings?
We understand -- we've been on the seesaw ourselves. The spending-saving seesaw, that is. As one goes up, the other goes down. And it sounds like your spending end has been high in the air for a couple of years. To solve that problem, may we suggest our Living Below Your Means discussion board, which is chock-full of ways to add some balance to your finances.
As for where to put your short-term/emergency savings, stay away from stocks. Any money that you're investing in the stock market should be money that you're willing to live without for a minimum of five years -- preferably longer. Since emergencies can and do pop up, you certainly don't want to have to suddenly dip into any money that you've committed to the stock market, especially if the stock market is not doing well at that time. Therefore, you need to be able at all times to pay the bills for a couple of months without dipping into you stock holdings.
Saving three to six months of your salary is a bit more than you really need to have sitting in the bank before you start investing. But it is a good idea not to commit any money to the stock market before you have three or four months worth of expenses saved up and ready for an emergency.
Does that mean that you have to settle for a typical no-interest checking account while you're saving up? Hardly. Look for an interest-paying checking account, or, even better, look into savings accounts, money markets, or certificates of deposit. To get the best rates, you may have to do some shopping.
The largest national banks don't always offer the best returns on your cash. Essentially that's because these banks have an awful lot of huge "brick-and-mortar" storefronts that they have to keep well maintained. Actually, in the case of banks, the "brick-and-mortar" often comes in the form of marble-and-brass, but you get the picture.
Try checking out the interest rates of banks that have no bricks, mortar, brass, marble, or even tellers or drive-through windows. Internet-based banks are currently providing the highest interest rates around -- currently around 1% to as high as almost 3% in checking accounts.
Even better than a checking account for your short-term savings would be a money market account. These accounts offer some of the advantages of checking accounts in that you can write three checks or so per month from them. Money market accounts also offer slightly higher interest rates than your typical checking account.
To learn more about the best interest options for your cash, visit our Savings Center.