So there are a couple of ways to think about this but I will give you what I believe are two simple strategies. One emergency fund + Investments OR The Three Bucket Strategy:
First the Emergency + Investment Account method:
First Establish the Emergency Fund
How much? 3-12 months of non-discretionary cash for your emergency fund. Three months if you’re single and highly employable and 12 months if you’re older (50+) with dependents and you’re the primary provider. For everyone else, six months is a great place to be. Put this cash or in money market accounts that are liquid (you can access immediately).
What type of account(s) should I use? Savings Account or checking account
Then develop Investment Account(s)
OR try the Three Bucket Strategy:
First Bucket: 3-12 months of non-discretionary cash for your emergency fund. Type of account: Savings Account or checking account
- 3 months if you’re single and highly employable and 12 months if you’re older (50+) with dependents and you’re the primary provider. If you’re in between 6 months is a great place to be. Put this cash in money market accounts that are fully liquid (you can access immediately).
- This is money that is used to generate income to replenish your first bucket, provide a safety net, and is supposed to be less volatile than investing in the general market. If your cash is used up in bucket one you take some of the money from this bucket and shift it over into bucket one to replenish that amount. For conservative investors, this is a great place to buy bonds with different maturities to build what is called a bond ladder (1-year bond, 2-year bond, 3-year bond). For aggressive investors, you may use a balanced approach of a total stock market ETF and a total bond market ETF (a balanced fund).
Third Bucket: 3 years + of equities
- This is your long term money. Money that you don’t plan to touch or use for anything other than to let it grow and compound. This should be invested into equities. Reinvesting your dividends and letting time run and the effect of compounding work for you.
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