What is the difference between saving and investing? Simply stated, we save for short term needs and invest for long term goals. Our short term time horizon is generally 5 years or less. We save for emergencies, for large purchases like a car or furniture, or a down payment on a house. We invest long term for our retirement or a college education for our children.
Before we start investing for the long term we need to establish a sound financial foundation with a savings plan. If your car broke down tomorrow could you afford to fix it? If you had to travel across the country for a family emergency could you afford to pay for it? If your boss suddenly told you he was cutting your hours during the slow season could you continue to pay your bills? If we begin investing before we have a solid foundation, our investment plan can simply collapse from the weight of current needs.
Having a regular lifetime savings plan is the best defense to weather the financial “storms” of every day life. Your goal should be to have enough saved to cover at least 3 to 6 months of living expenses before starting your long term investment plan. If your income varies considerably from month to month or season to season you should save 6 to 12 months of living expenses.