Have a Cash Flow System
Every dollar you have should have a job. If you aren’t giving a job to every dollar then your dollars are working against you.
Here’s What I Mean
We all know you ought to have an Emergency Fund. It should be a defined amount that you keep available. You should also have available any cash that will be going out the door in the next five years. This would be expenses that you have planned that extend beyond your income.
Extra Expenses in the Next 5 Years
For example, maybe you are considering buying a house next year or doing a major remodel. The cost of those large transactions in the future that will not be covered by future income, needs to be kept in a safe place.
You don’t want to risk your ability to complete a remodel on the stock market, so we want to keep that cash in a safe place. The job of both your Emergency Fund and your savings for future expenses is simply to be there when needed.
If you are tempted to invest your Emergency Fund and take risk with it or lock it up in a CD, you are not allowing that money to do its job. You’re not allowing it to be there when you need it. By the same token, if you have money laying around that doesn’t have a job, it will disappear.
Give Every Dollar a Job
As your saving balances build above what you need for your Emergency Fund and future spending, that money needs to have a job too. It’s function, if we don’t need it for emergencies and we don’t need it for near term spending, is to go to work in your Long-Term Portfolio. Its job is to grow.
So, there you have a very simple Cash Flow System. Keep what you need for emergencies and short-term expenses above future income in a safe place. Put everything else in your Long-Term Portfolio.
You could make it more complicated than this, but I don’t often see a reason why.