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Savings and the job market

Question: I recently graduated and started my first job. I paid for my own school and have no debt. I have a good job and I am maxing out my contributions to my Roth 401k.

My question is "How much money should I save and when and where should I start investing?"

I have heard that you should save 6 months of expenses and then start investing. Is this because that is how long you will take to get another job? Should I save year's worth of living expenses because the economy is bad and the job market is tough?

Also, stocks seem intimidating and investing at a small scale seems to not be worth it especially considering trading fees. Alex , The Woodlands, TX

Answer: These are all good questions. You're starting out with a good financial foundation, too, with no debt, a job, and participating in a retirement savings plan at work.

Since you are saving for retirement I would focus on building up your emergency savings. The size of the cash cushion is tied to the amount of time it might take to find another job. For an earlier generation of workers the rule of thumb was to set aside 3 to 6 months worth of expenses. The goal has been raised to 6 months to a year.

The job market has become far more difficult even before the trauma of the Great Recession and anemic recovery.

For instance, private sector job growth at an annual rate of 0.6% during the business cycle expansion of the 2000s was the weakest in half a century. The job creation figure was a shadow of the 1.8 percent annual rate of private job growth in the '90s and the 2.0 percent yearly pace of the '80s. It's hard to see much of an improvement anytime soon with some 25 million Americans unemployed, forced to work part-time, or too discouraged to look for work.

Little wonder it takes longer for people to find a job. You need more savings to tide you over a rough patch.

Here's the thing: The initial impetus for building up safe savings in taxable accounts is to create your own financial safety net. But with time the savings is available to voluntarily fund job, career, and lifestyle shifts throughout a lifetime. "You save not to have freedom from work, but the freedom to do the kind of work you want," says Marc Freedman, head of Civic Ventures, a nonprofit organization.

In practical terms, my main recommendation is to establish an automatic savings program that regularly puts money into a variety of taxable accounts. Some of the money could go every month into a savings account, certificates of deposit, Treasury bills, and the like. You could load up on tax-deferred I-bonds, the inflation-protected savings bond.

When you have enough set aside you could also invest some money in a broad-based no-load low-fee stock index fund, such as the Wilshire 5000, the Russell 3,000, or the Standard & Poor's 500. The mix of relatively safe and riskier savings starts out small, of course, but it accumulates over time. You can learn more about the basics of investing with straight-forward books like The Random Walk Guide To Investing by Burton Malkiel, Jane Bryant Quinn's Smart and Simple Financial Strategies for Busy People, and my own book, The New Frugality: How to Consume Less, Save More, and Live Better.

You have time to become more comfortable with investing in the markets.

The savings can be tapped at any time without penalty to fund a career change or to pay for a medical emergency. It's a simple strategy that gives you flexibility.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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