We have multiple "savings":
Checking account = $500-$1000 minimum balance
~ used and replenished every calendar year
~ padding for those once a year or random expenses (such as auto insurance, homeowners insurance, registration, property taxes, etc)
~ I budget for all expenses for the year and average them across every month, so the money is there and waiting. The minimum balance is to account for timing. (It stays there year after year.) This started because our car registrations are due in January and February.
~ technically, we keep $300-500 in our checking account at all times and $500 in a basic savings account linked to that checking account (credit union)
-------> no fees to automatically/instantly (no thought required) cover any expenses that our checking account cannot cover; an old-fashioned "overdraft" account; the savings account provides complimentary life insurance for the primary account holder; each additional member of our family has the basic savings account with the minimum dollar amount for this feature to kick in ($100)
Short-term savings = 3.2% of gross income contributed monthly = 3.4% of total savings as of 10/11/12
~ used within each calendar year with some rollover from one year to the next
~ home improvement one year alternating with a family vacation the next year
~ if we want or need to do both in the same year, then we plan small/low-cost (we planned and did a low-cost family vacation back in the Spring; we planned and have yet to do a moderate home improvement project, so the account is actually higher than usual for the time of year...it is usually ~1% of total savings or less by now)
~ we currently use ING for this account because it is takes a bit of thought to transfer funds for use in our checking account at our credit union, yet we can use an ATM card for cash on vacation with no fees
Mid-term savings = 6.3% of gross income contributed monthly = 28% of total savings as of 10/11/12
~ timeframe is greater than one year and before or during retirement
~ unemployment (aka "emergency fund"; total is nearly 15 months of basic expenses, but that's not really our point anymore)
~ or car (we pay part in cash from this account and finance part for credit purposes and pay that monthly amount from our regular expenses; our cars are 2004 and 2006 models and will be good for several more years each)
~ or supplemental retirement (we are/were limited in official retirement/tax-advantaged savings, but are hopeful that will change soon)
~ or college (we are on track to have our mortgage - only debt - paid off by the time college rolls around and use that monthly dollar amount to assist.... the first payments and such will likely be due before then, though, so these savings will handle timing issues)
~ or any other large dollar amount situation (for example, DH was offered a partnership in his company recently and we were able to buy into the LLC with these funds)
~ the current asset allocation (below) is different than usual, but the majority (barely) is the safe/insured and relatively liquid funds -- I need to rebalance the mix in the coming months.
-------------->online savings account that is federally insured, but takes several days to access = 51% of this category of savings
-------------->mutual funds = 22% of this category of savings (fairly liquid -- takes about a week and costs a little bit for one brokerage; free and shorter timeframe for another brokerage, but other issues aren't as favorable)
-------------->LLC = 19% of this category of savings (not liquid at all -- only available under specific conditions, retirement or unemployment being the most common and neither is likely for the next 20+ years)
-------------->stocks = 5% of this category of savings (fairly liquid, but hate to sell without a profit -- takes about a week and costs a little bit)
-------------->non-insured money market market + bonds = remainder (the money market is simply a vehicle to purchasing mutual funds at a specific brokerage; it's free and pretty liquid; the bonds are boring/steady and I like more risk, so this is the smallest part of our portfolio that will slowly increase as the time nears to use this category of savings)
~ we use a variety of accounts for these funds, but slowly nearly everything is falling into one bank's hands -- I'm not real happy about that and will be investigating other options in the coming months.
Long-term savings = 10.6% of gross income contributed monthly = 68.6% of total savings as of 10/11/12
~ retirement funds
~ both of us have been saving for retirement since our 20s (although much smaller amounts back then) and it grows, it really does!
~ even at these percentages and length of time saving, etc., these funds would only last us ~36 months (3 years!) in basic expenses - retired (which would work out to roughly the same standard of living when all the pluses and minuses were finished....such as no mortgage or commuting expenses and only one car; versus under an unemployment scenario still having a mortgage and two cars while cutting many other expenses down to bare bones temporarily)
~ social security for both of us would add to the coffers, as would any potential inheritances from our parents and my grandparents -- none of which we are counting on, though...
~ my retirement funds are with two brokerages and DH's retirement is with the same brokerage as my main accounts
All this may sound soooo incredibly complicated and it is, for a beginner. We're not beginners anymore.
I/We started by keeping a higher and higher minimum balance in a checking (and/or linked savings that is truly free for overdraft protection) account for smoothing out the bumps of living paycheck to paycheck. It takes discipline. DH and I are both college graduates (I put myself through college and DH's parents paid his way), but our approaches to finances are different. I am far more disciplined about savings. He made a LOT more money than I did when we met and yet I had a much higher savings balance (hell, he didn't even HAVE a savings account! LOL). Reduce expenses and raise income and exercise savings discipline ("pay yourself first" NOT transfer the "extra" at the end of the month; COMPLETELY different mindset, even if the dollar amount is identical!!!) until you no longer live paycheck to paycheck (not directed at the OP, obviously). Saving money AND paying off debt at the same time is worth it; they serve different purposes that are all necessary. I don't recommend a 50/50 split for that, but it is important to save even while paying off debt. The exact split really depends on many factors.
Then, we both contributed to our company 401k programs at the best "match" rate (slowly working up to it at each opportunity, which were limited back then to certain times a year). Personally, I offset every raise with most of the new income going into my 401k, but I was already living modestly. DH had to reduce expenses (aka frivolous spending) and increase his contributions by a little bit at every opportunity. If you have a 401k through your employer, I hope you are contributing to it with every paycheck. If you do not have that opportunity, then I highly recommend opening and contributing monthly to an IRA (or Roth IRA). Slowly work up to maxing out the possible contribution level.
Only then did we work on building a true savings plan (short-term and mid-term in my terms above). Honestly, the economic conditions created a carefree attitude about "emergency funds"...that term wasn't really used when I was in college (business degree with concentrations in marketing and finance). My short-term and mid-term terminology are old school and partially made-up by yours truly. LOL In any case, they were one and the same (and called "the house fund" meaning our down payment) until we owned a house. I always considered the $1000 minimum balance in our checking/savings overdraft set-up to be our short-term savings (or "emergency funds") before we were homeowners. That dollar amount doesn't cut it for homeowners, though. And, the dreaded DOUBLE unemployment occurred just over a year after becoming homeowners and 8 months after becoming parents. Thankfully, by this time we did have a real savings account and were okay financially despite both being out of work for 6 months each, overlapping about 4-5 months. All the stars aligned for us and we were able to make do with what we had and began building back up as soon as we were both employed again, even though DH took a HUGE pay cut. My pay actually rose, but I was only working part-time so it was less influential.
I hope all this helps someone out there. I've worked with MANY people and their finances (professionally and personally). In my experiences, one's attitude or mindset about finance matters FAR MORE than the actual dollars and cents.
To the OP:
The bottom-line to my advice is to diversify your savings. Take the time to divide it up. Use tax savings to your advantage and use liquidity to your advantage. Everyone needs some liquid assets, but not everything needs to be liquid (easily obtained in cash). Less liquidity equals other benefits, such as long-term usage, tax savings, higher interest/earnings, etc. Increasing risk is okay, too, just go slow and learn along the way. Learning can be book learning (visit your library) or online researching or talking to a professional or listening to successful friends and family and asking questions (or all of the above). Best wishes!