In these difficult economic times, many people think that they should change their saving and investment priorities. However, no matter what the economic climate – good, bad or neutral – your financial priorities and where you save or invest money should remain the same. The key questions are: What is the order of your priorities? And where should the money associated with each priority be invested?

Your Emergency Fund
When you think of savings and investments, you probably think of dividends and growth. Yet, while specifically not intended for dividends or growth, an emergency fund is actually the first and most important part of your savings portfolio.

Everyone, regardless of his or her income, depends on a regular stream of income to paymonthly bills. But what if that income is temporarily stopped due to a layoff or thrown out of whack by a large, unexpected expense? That’s where the emergency fund comes in.

Ideally, your emergency fund is equal to at least five months worth of living expenses (eight to nine months if you’re self-employed). It should be in a safe, liquid account (such as a savings or checking account covered by deposit insurance, or an insured money market mutual fund), which guarantees that the full amount will be there and easily accessible if and when you need it.

CDs, individual bonds, non-money-market mutual funds and individual stocks don’t qualify: CDs and individual bonds aren’t liquid and non-money-market mutual funds and individual stocks aren’t completely safe. Nor is a home equity line of credit suitable for your emergency fund because it’s neither savings nor an investment, but rather equity built up in your home, and, therefore, should not serve as a substitute for an emergency fund.

Saving for a Home and Retirement
Once you have an adequate emergency fund established, what’s next? For most people, especially if you’re young, the next priority is saving to buy a home. This, however, should preferably be done in conjunction with beginning to save for retirement (although, for many, saving – or at least, saving a lot – for retirement may have to be delayed until the money needed for a down payment is saved).