Many financial advisors recommend having 3-6 months of expenses in savings in case of emergency. While the amount you want to keep in savings may vary, I highly recommend doing some research and opening a higher-interest savings account online than what you probably earn in your local bank. There are many e-savings accounts that offer greater than 4.5% interest right now. Just be careful to read the fine print. The one I have the most experience with is ING Direct, which is currently at 4.5% interest and allows up to six transfers per month between it and your checking account.
No matter what route you chose to go, it is important to maintain some amount of short term savings for emergencies. This can be built up over time and having the money in an account that earns a decent amount of interest is never a bad thing. And the e-savings accounts are FDIC insured so there is an extra level of protection. Since the money is going to sit around in case of emergencies, why not earn the maximum amount of interest you can?
One of the biggest indicators of a company's stability is it's cash flow. It is the same in personal finance. It is important to maintain a level of savings for emergencies so you don't run out of cash. Let me give you a very personal example of how I learned this lesson the hard way.
Two years ago I had set up my finances to where every dollar I earned was invested in something and regularly brought my savings/checking account balances very low. I was very careful to calculate exactly what I needed so as not to short myself in cash and managed it well. However, I was to receive a check for a partnership I was involved in at the time and so I moved some things around and as soon as the check came in, I fully invested it. The check was refused several days later; the investors asked us to hold for another month. All well and good, except my checking account was now negative. And rent was due in two days. I ended up borrowing money from a friend for a week while I moved things around again in order to cover the missing amounts. It ended up being a very good lesson to me about keeping some money in savings! And with the high interest rate savings accounts, you don't have to feel like your money isn't working for you.
I hope you take away two things from this post. First, keep some amount in liquid savings. And second, since it is best to keep some money in case of emergencies, maximize the earning power of that amount by having a high-interest savings account.
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