I think we all know how to build 3-6 months in savings. You simply don’t spend money and put it in savings until you have enough to cover 3-6 months worth of your bills. Not that complicated. But if you’re like me the execution isn’t quite that simple. Knowing what to do is different than actually doing it.
Personally knowing I have things I need or just want to buy always seems to get in the way of getting to that elusive 3 months, let alone 6. Why is that?
Well if you’re like me it’s probably because there just isn’t any incentive to put your money into a savings account where it doesn’t accrue interest, or if it does accrue interest it’s not even enough to beat inflation, so you’re literally losing money having it sit in your account.
Gee, no wonder it’s so hard to do. There really is very little incentive to do that.
That has changed for me since I completely changed the way I’m building a “savings”. Here’s a better way to save money.
But, before we get into it, I need to let you know that I’m not a financial advisor and none of this is financial advice, I’m just explaining a strategy that has worked for me but ultimately you need to do your own research.
With that being said. Here’s a better way to get to 3-6 months worth of savings for emergencies. Invest.
Why would you put money into a savings account that is technically losing money? That seems pretty stupid.
What has worked for me is investing in a blend of stocks and cryptocurrencies that have equaled 6 months worth of bills.
In other words, if I were to lose my job today. I could sell my investments to live off of.
I always keep “cash” on hand as well as I don’t want to be 100% exposed to market conditions. I use this tracker to understand my exposure and make sure I’m invested within my personal confidence of the market.
Investing Strategies for 3-6 Months of Savings
First off, it’s important to note that investing in highly volatile investments could be risky if you’re using this as a “savings” account. Let’s use cryptocurrency as an example and let’s say you had invested in Bitcoin.
Even though Bitcoin has went up over 270% the last year, had you invested at the wrong time and been forced to sell then you could have lost a lot of money. In other words, if you put 3 months worth of savings into Bitcoin and the price went from 64k to 33k in a short amount of time and you were forced to sell your Bitcoin to turn into U.S. dollars to use for an emergency, then this certainly wouldn’t be a good way to “save” money. It would be a terrible way to save.
So, investing in stocks or cryptocurrencies that are less volatile and are more “stable” may make sense.
A good way to look at this (and mainly what I do) is to invest in 2 months worth of “savings” into more conservative investments, 2 months of investments into somewhat in between, and 2 months worth of higher volatile stocks or in this category, cryptocurrencies.
With a bit of a caveat that it’s also a good idea to keep “cash” on hand within each of these categories.
A guide I use is to have 10-60% “cash” within my “low-risk” investments, 25-75% within my “mid-tier” risk investments, and 30-95% within my “high-risk” investments.
This basically means to keep money available within the exchange you are buying these assets from or separate bank accounts that you can deploy if needed. This gives you an opportunity to “buy the dip” and “sell the rip” or long or short the market.
Conservative Investments (2 Months of Savings)
These are your boring stocks you know that likely won’t 10x or even 5x or hell probably not even 2x in the next 12 months or so, but at the end of the day they will likely be here 5 or 10 years from now and gain at a decent rate.
Having these conservative investments as kind of “rock” for your entire portfolio is key.
Examples here would be WBA (Walgreen’s), KO (Coca-Cola), XOM (Exxon), these can not only grow but pay some dividends as well. The point is if an emergency comes up and you have to sell, it is less likely with these that you’ll be forced to sell after a 50% drop, and hopefully you will see gains before having to sell.
And they don’t have to be dividend stocks. One of my top picks I would consider in this category is BRK.B (Berkshire Hathaway). This is actually an ETF so is already a blend of stocks. Personally, I see this as having an incredibly high rate of being around in a decade making it a “safer” investment.
Mid-Tier Risk Investments (Next 2 Months of Savings)
If you want to go with some riskier investments that may have a higher growth potential, typically this is where you’ll look at some growth stocks that may fall under lower market caps that haven’t been around quite as long as some more conservative dividend stocks.
Some I personally hold that I would consider to fall under this category would be CRSR (Corsair Gaming), WYNN (Wynn Resorts), and Shopify (SHOP). These all have different market caps but the risk/reward I consider to be more in this category. However, I personally see these stocks as having massive growth potential from where they are at but are much more uncertainty (especially short term) than the “safe investments” I listed.
High Volatile Investments (Final 2 Months of Savings)
After you’ve built up 4 months worth of savings you have a pretty good cushion at this point and if you want could consider some high-risk, yet high-potential investments.
This is where cryptocurrency and penny stocks fall. Penny stocks would be considered pretty much any stock that has under a billion dollar market cap. Cryptocurrency is not only Bitcoin but includes thousands of “alt coins”.
If you hit big on some or even just one of these, this is where you could potentially 10x…100x…or dare I say 1000x your money. Now of course with potential like that comes more risk. In fact, if there wasn’t that risk there wouldn’t be that kind of potential in terms of gains.
However, this is a big reason why you may want to consider this after already having a cushion with “safer” investments. But investing in these projects and companies can be fun knowing you have the potential to make a lot on your investment.
As I mentioned above, keeping “cash” on the sidelines here is important, and I chose a range of 25-95% here. This is a massive range of “cash” to keep on the sidelines and it’s going to change based on market sentiment and my confidence levels at the time.
In other words, if I’m 50/50 on what happens next I basically keep 50% in various coins/stocks and 50% in either USD or USDC. If things have sold off and I want to “buy the dip” thinking things have bottomed out, I might move over to 70/30 where I have 70% in coins (or stocks) and only 30% on the sidelines. And vice versa.
This means with highly volatile investments it’s something you have to pay more attention to.
Should You Just Pay Down Debt Instead of Investing?
This is the million dollar question. And ultimately the choice is yours as to what you want to do. That being said, a lot people suggest just having $1,000 in savings, pay off all of your debt, and only then start investing.
But what if something comes up? Then what? You have to get into credit card debt or try to take out a loan to live off of or something like that. By the way, credit card debt is the exception to this, I’m not talking about high interest rates that typically come with credit cards, pay those off and you also have that available credit you can use as well if you ever had to.
But ok, let’s think about the “$1,000 in savings plan”. If you only have $1,000 in savings, and your bills plus living expenses (food etc.) total $5,000 a month, and you happen to lose your job…you’re good for about a week. That’s it. And who would give an unemployed person a loan?
The great thing about investing in stocks or cryptocurrencies is that you can sell them back to U.S. Dollars and receive the funds in your bank account in roughly 1-2 days.
So I’d much rather do this as a strategy for saving so that if I ever need it I can just sell some of my assets, and typically start with the more “stable” less volatile assets to sell and still be able to hold my high-volatile assets. Once you get to this point then switch over and pay down debt instead.
Works for me.
That being said it’s a good idea to stick with your plan. If your investments have taken off and you feel there is a good chance they drop off in the near future, you could always choose to sell and pay off debt. I mean if you have a good opportunity to knockout some debt and go from 6 months worth of “savings” to 4 months instead then great, you can choose to do that (just don’t forget to account for taxes on capital gains).
What This Could Look Like
So a hypothetical of what this can look like would be something like this (at least as far as what I personally try to implent).
We’ll give some general numbers here just to give you an idea what it would look like.
Hypothetical scenario: You have 150k in mortgage debt, 50k in other debt, and your monthly expenses including food, gas, and entertainment total roughly 5k per month.
5k x 6 months=30k.
So you’d invest in 30k worth of stocks/cryptocurrencies before you start tackling debt.
10k would be safer investments. 10k in “mid tier” investments. 10k in “high risk” investments (with each of these actually keeping “cash” on the sidelines).
At that point you could then decide if you want to keep investing, or you could start putting extra money towards your debt. Or you could even sell off 10k in investments and pay off 10k in debt. Of course you’d only be at “4 months” of savings if you did that.
Obviously, you could go about this anyway you want.
This Strategy Gives You an Incentive to Save Money
If you’re making money from your money just sitting there, then you actually want to save money. Investing is fun, in my opinion at least. But that’s what it all comes down to, are you actually determined to build 3-6 months in savings?
I sure wasn’t until I adopted this strategy. Now, not only have I been able to do it but I also don’t want to have to sell any of my assets before their story plays out or they’ve reached the valuation I believe they are heading for.
This has personally helped me to make better financial decisions as before I would be much more likely to buy things I didn’t need.
Every time I want to buy something I don’t need, knowing that I normally would have just spent that money, I now just put that money into an investment, whether that is $15 or $500. Consistently doing this adds up over time.
Will You Build a 3-6 Month Savings this Way?
Or likely you’re own version of it? Or will you do so by trying to put money into a regular savings account? If you’d rather keep money in savings what would your reasons be? Do you think you should just pay extra towards debt instead? Do you already have 3-6 months in savings built up? Did this article help give you any insight at all? Let me know in the comments below!