I often discuss the importance of saving.  I thought I'd spend some time talking about the different kinds of savings.

• The first type of savings is something financial columnist Michelle Singletary calls the life happens fund.  It's a moderate fund (say $500-$1500) that you use for the annoying expenses that arise in life:  the car breaks down, the hot water heater must be replaced, etc.  A good sale on cashmere is not what this fund is to be used for.
• The second kind of savings is emergency savings.  As a rule, you want to have at least 6 months of living expenses.  You only use these funds in case of a serious emergency — like loss of your job.  You'll need to build up to this level over time.  Try to save a bit each month.  Since you hopefully won't need this money, especially in the short-term, you should keep in in a safe, interest-bearing vehicle, like a short-term CD or a money market account.
• The third kind of savings is for long term, but expected expenses. Think saving for college or for a new car for when your current one wears out.  This is not for annual expected expenses, like your Christmas fund.  Those annual expenses should be part of your regular budget.
• The fourth kind of savings is for major purchases.  This would be for things like a house, a major vacation.
• The final kind of savings is retirement savings.  These are the pesonal savings that supplement whatever you will have from work and/or government programs.

Step one in planning to save is deciding if you need all of these.  Types 1, 2, and 5 should be the priority.  Tomorrow, we'll look at step 2.