In general, most financial advisors would recommend having three to six month worth of salary in reserve. Personally, I prefer having the equivalent of one year salary in savings.
The difference between savings and investing are their purpose. Savings are funds that are usually time sensitive and have a specific purpose, such as a down payment on a new home, send kids to college, pay bills even if you get laid off and so on. They are funds that should be available when they are needed. Its goal is to keep your purchasing power by beating inflation without taking much risk. If you are dollar based, a good way to do so is to keep them in U.S. I Savings Bonds (I-Bonds) or in U.S. Treasury Inflation Protected Securities (TIPS). These securities are backed by the U.S. government. They guarantee that your savings will keep up with inflation.
While your savings only need to keep up with inflation, the goal of your investments is to make a return above the inflation rate by taking risks. Think of investment funds as your money in business to make more money for you. But as in any business there are risks and your money may be lost. Using the analogy of a corn farm; the corn that is kept in silos are equivalent to savings while the corn (seed) that is used to sow and grow new corn fields are equivalent to investments.
Before we start the eclectic investing program, make sure that you know the difference between savings and investments, and that your savings account is fully funded.
In a future post I will be reviewing how to fatten your savings accounts