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A savings account should consist of money that you need immediately.
You can gain access to the money with days, if not hours. Because
this money remains complete liquid, you will not get anywhere near
the return you could expect with a mid to long term investment.
For example: buying a stock, index funds, or some decent mutual
funds. On average, at least since I have been around, the return
is one third to half of what you would see by putting your money
into the market.
So don't get fooled into thinking that an online savings account
is an investment. You should try to sock away 3 to 6 months of expenses
for yourself and all dependents. The length of time depends on the
nature of your work. If you are in a stable career, for example
school teacher, 3 months should be plenty. Assuming you continue
to enjoy your job, you should be working for a long time. If you
work in a less stable field, like my father did in the electricians
union, you would need to save 6 months if not more. My father would
be out of work 4 months out of the year on average due to his career.
Also take into consideration the month you choose to determine
your expense average. I always choose the holidays months to calculate
my average.
Another good idea is to consider 3 month CDs when you think the
rate will drop or if you come across a promotional rate. This will
be for some one who is maintaining greater than 3 months of expenses
in their account.
Money beyond your 3 to 6 months of expenses should be invested
in the market. I would highly suggest Vanguard index funds, if you
are uncertain with where to put your money. Also consider a financial
advisor. You have many that will not require money up front. If
you don't know someone I would suggest looking into a franchise.
I use Edward Jones. To date after all the commissions have been
paid, I'm seeing 14% back every year on my money with them.
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