I have a degree in economics. However, I don’t work in an economic field so my knowledge has been fading. I hence call myself a banana economist i.e. I am not a qualified economist. It’s my disclaimer for this post.
I do apply some economic theories (that I can remember) in my saving strategy. And, I think it’s worth sharing. You saving strategy should be arranged by “asset liquidity”. A liquid asset is an asset that can easily be converted into cash in a short amount of time. So, based on this definition, cash would come into mind. When applied to a saving plan, you should have 3 buckets of assets:
Bucket 1: Highest liquid asset: this is your cash saving. My rule of thumb is you should have cash in your bank account that lasts for 6 months if worst thing happens to you. Please note the return on the highest liquid asset is normally the lowest. It’s a tradeoff.
Bucket 2: Moderate liquid asset: this bucket could be mutual fund, stock, gold, or all of them. You cannot convert this bucket to cash as easy as cash. The value of these assets might not be good and you may have to wait a little. But, you can convert them to cash if you want to.
Bucket 3: Illiquid asset: This is your property (portfolio if you have more than 1). It is your long term investment. In general, this type of assets should increase in value over times.
This is a saving plan of a life time. I don’t like stock market as it’s very risky. Therefore, the above suggestion is for a risk averse person.