The difference between saving and investing

OFTEN WHEN PEOPLE ask me a personal-finance question, they feel embarrassed.

They start with, "I know this is a stupid question. but ... "

I'd be lying if I said I'm not alarmed when people ask about financial matters so basic that to not know is frightening.

One woman, who was putting money into her 401(k), said she wasn't investing and wanted to know how she could start. She had no idea she was already investing in various funds within her workplace retirement account. She thought investing only meant buying individual stocks.

But I'm glad she asked. When it comes to your money, no matter how silly you think your question is, ask. No question is too basic, because this money stuff is hard. It's complicated. It's scary.

Some regular participants in my weekly online discussion tease that when they want to make a financial decision, they ask themselves, "What Would Michelle Do?" I know they don't believe I've got all the answers - I don't - but I appreciate the trust. They know I don't have an agenda other than to help them make the best decision possible.

So, this year, I want to amp up answering more of your questions in a new feature I'm calling "Ask Away." Better to ask and know than to stay silent and uninformed. No question is too simple. Here's a question I received recently:

"I am sure you've answered this many times, but on average, what should you keep in the life-happens and emergency funds? Honestly, I have never had these. Where should you keep the money? Not sure what makes the most sense. I'm thinking the 401(k), since I am in my early 40s and started this later than I should have. What do you think?"

I know what some of you experienced savers are thinking: Doesn't this person know that a 401(k) is investing, which means taking risk, and that your rainy-day money shouldn't be at risk?

People don't know.

They hear advice that they need to save and invest. And they think it's one and the same. They vaguely know that their money should grow. Yet with interest rates on deposit accounts so low, they feel cheated or naive if they put their savings in a simple bank or credit-union account.

But you've got to have a safe pot of money that isn't subject to the ups and downs of investing. I actually have two types of rainy-day funds. The first is my emergency fund. That's money set aside for drastic financial situations such as a job loss. This pot of money could sustain my household for about a year without any income, meaning my husband and I can pay all our bills - mortgage, utilities, cable, food, school fees, transportation, vet visits for the dog, etc.

It's important that you don't just focus on saving for the major household expense categories. In my experience, it takes people a few months before they reduce their expenses after they lose income.

To arrive at what should be in your emergency fund, pull your bank statements and add up everything it takes to run your household for a month and multiply that figure by the number of months you want to have saved.

I know a year's worth of living expenses is aggressive if you're new at saving, so, starting out, aim for just one month. Make the figure too high and it'll be so daunting that you'll give up. Then go for three months. You'll be in good shape when you get to six months.

Money in your emergency fund is left untouched in a deposit account. And yes, it's not going to earn much interest. But that's OK because, remember, you're not trying to grow this money.

The second savings account is a life-happens fund. I created this pot so that I wouldn't have to tap the emergency money. You'll withdraw money from this fund to pay for unexpected or major expenses that don't quite fit the dire straits definition. Car repairs would come out of this account. Start with trying to save $500, increasing to a few thousand, ideally.

Money will be going in and out of this account. You save. An expense comes up and you'll pull some money out. As soon as you can, replace the funds.

I like to view saving and investing as different actions, although both are intended to provide safety. You save for emergencies, unexpected expenses or your wants and needs. You invest for the future to stay ahead of inflation, or to send your children to college and retire comfortably.