An emergency fund
Jason Hall: There’s a lot of compelling evidence that investing in stocks is the best way for the regular guy (and girl) to attain financial independence. Unfortunately, a lot of people don’t understand how important it is to also have a strong margin of safety. For most of us, the best margin of safety is cold, hard cash.
If you don’t already have six months’ of living expenses (maybe more if you have kids and a mortgage), then the best place for you to start with that $100 per month is putting it in a savings account.
Yes, with current interest rates you won’t get much of any return on your savings, but it’s important to remember that a safety net isn’t about getting return, but about keeping you from having to dip into investment accounts like your 401(k) if you have a financial emergency.
This is especially true if you were to lose your job, or suffer an unexpected illness or accident that impacts your income for weeks or even months. Having the margin of safety of several months of income in cash will mean that life’s unexpected events won’t end up affecting your retirement plans. Interest rates stink, I know, but this is about protecting the downside. Not capturing more returns.