Your Savings Target is made up of two components.
First, your Emergency Fund is the money you set aside in case the worst probable case happens (not the worst possible). For most people this is losing their job, and a good starting point to think about this is 6 months of spending.
Second, add up your net cash needs over the next five years. For most of you this will be zero – meaning all your expenses will be funded by expected income.
If that’s you, great! Your savings target is simply your Emergency Fund.
But if you have some big expenses coming up like college for the kids, a daughter’s wedding, or perhaps a big remodel, we want those funds on the sidelines out of the market.
This allows us to think of our investment portfolio as truly long term because we know we won’t have to touch it for at least five years!
Any cash you have over and above your Savings Target should be invested in your Long-Term Portfolio. Don’t let it just lay around or it will find a way to disappear!
For more details, check out a deeper analysis at www.BestFinLife. com/blog, but in this space I want to simply make the point that this can be very important.
For a limited time, I am offering a completely FREE financial conversation on the topic of your choice. FREE, that is, from cost and also FREE from any sales pitch. Simply schedule your call here: www.calendly.com/bestfinlife/free-financial-conversation.
Best Financial Life is a Registered Investment Advisor with the State of California and Joe Morgan is a fiduciary to his clients at all times.
By Joe Morgan, CFP®, CFA, Principal: Best Financial Life, Resident since 2004