People say money cannot buy happiness. But I say money can buy you security and freedom and that makes me happy! In life we definitely need some adventure, but I would not call losing a job and wondering how I am going to make my mortgage payment adventurous! That is just stressful! I call hiking Mt. Fuji, white water rafting down the American River, or taking a new exciting job adventurous! Your savings and investments for goals such as early retirement can also keep you afloat during tough times. Your investments, coupled with side hustle income and unemployment can prove a powerful Safety Net to weather the storms of life.
Some people are just a paycheck away from financial ruin. Look at all the millionaires that end up losing everything. For example, Curt Schilling lost $50 million when he invested everything in 38 Studios, a video game company that was destined for bankruptcy. The goal of your Safety Net is to never be a forced seller of your home or investments! If the unfortunate were to happen, we want a nice safety net to keep us afloat financially during the storm. Living paycheck to paycheck or investing too dangerously can also lead to financial ruin–ask anyone who leveraged up to buy more real estate in 2008!
INVESTING AS A SAFETY NET
Peace of mind is a wonderful thing, even if it
ends up costing you more in the long run. This is exactly why people buy insurance. Even a small fender bender can cost $5,000-$10,000 to repair. No one wants to be hit with a surprise repair bill, so they buy insurance and smooth out the cost of that repair over a longer mount of time. We cut the cost down to a mere $100 per month or so. Usually people end up paying more for the monthly insurance premiums than what it would cost to repair the car, but they never have to worry about having a very expensive, surprise repair bill. Sleeping easy at night is often worth paying a small premium.
We should think of investing as another form of insurance. Saving and investing a bit of money now (the monthly insurance premium) will protect us in case of a financial car crash. It can protect you during a layoff or surprise medical expense. Remember, money should buy us freedom and peace of mind.
Ideally, our Safety Net will can consist of a lot of different income streams, but it is up to you to set most of the up. If you happen to get laid off, Unemployment is obviously the easiest Safety Net income stream. Your investing Safety Net will be more difficult to set up, but you can access it whenever you damn well please! Unemployment won’t save you in the event of a medical expense or if you quit your job out of frustration, so we cannot solely rely on it. Any side income or alternative income stream can further strengthen your Safety Net.
HOW TO CONSTRUCT YOUR SAFETY NET
Diversify! Get as diversified as possible right
now! And I do not mean spread out your stocks to all the different sectors, like people normally mean when they say diversify. I mean spread out your assets to as many different income-producing places as possible. Spread out your time and effort to maximize your investments and your Safety Net.
investing in many different areas will help smooth out downturns. If you get laid off, you can fall back on cash savings, income from a side hustle, or income from investments like dividends or rent checks.
If you did something apeshit, like invested all of your money into ONLY stocks and then got laid off in 2008. That Safety Net of only stocks you tried to construct fell apart the second you needed it most! If you needed money to pay your mortgage or to feed your family and ended up selling some stock in 2008, you sold it at a HUGE discount to other investors. Those investors had a strong, diversified Safety Net and spent 2008 scooping up bargain stocks and houses from others without Safety Nets for pennies on the dollar.
DON’T DIVERSIFY YOUR STOCKS, DIVERSIFY YOUR INCOME STREAMS
There really is not magical formula for diversification. If someone tells you to have a 70/30 stock to bond ratio for diversification, RUN AWAY because that idiot does not know what he/she is talking about! Our changing financial environment has too many factors to have a one set of rules for what to invest in.
Instead, dabble in everything! Go bargain hunting until you find something worth investing your time or money into.
Find a side hustle that earns some income. The only thing limiting your side hustle is your creativity. You could drive for Uber, start a blog, work a wedding photo booth, start an Etsy store, or even mow lawns. It is just about finding something remotely fun that can earn extra money! It is so easy, we dedicated an entire article to it: Check it out
You could buy a rental property. Do some research on how to find and properly value a rental property. There is no stock ticker going up and down everyday for your house, so it is easy to hold on for the long-term and not panic-sell. You could even do something as crazy as renting out your current house and downsizing to an apartment. You could also rent out a bedroom to a friend and earn a lot of extra money. House hacking like this is one of my favorite ways to build wealth! Be sure to do a lot of research, as real estate is a very ‘local’ investment, meaning rent, housing prices, and investment returns can vary drastically between different cities or even neighborhoods.
Hold some safe investments. Depending on the current interest rates set by the fed, determine the best safe asset. With interest rates near zero, cash might be as good as bonds or CD’s. We always wants to keep some money liquid so we never become forced sellers of our homes or stocks. Just remember the fed is targeting 2% inflation, so we can’t keep too much cash. You will need to take a look at factors such as job stability, debt obligations and dependents to determine how much liquid cash to hold. A young, single government worker will not need as much cash reserves as an independent contractor with three kids and a two rental property mortgages. During a recession the contractor could lose a lot of income and if he does not have enough liquidity, he risks losing his rental property investments as well.
It is great to invest in some stocks. They have historically provided very good returns over the long term. The reason the market always goes up over the long haul, is because companies become more productive (producing more and lowering costs), inflation exists (remember the fed’s 2% target), and innovation (30 years ago private computers did not even exist).
MONEY = SAFETY
Treat your savings like a Safety Net and don’t go apeshit and invest only in stocks. Diversify your income streams so you can weather the storm. You will be much happier if you get laid off or break your leg and can’t work. Remember to keep enough liquidity to never be a forced seller of your assets. And get creative with a side hustle already!
Readers: how are you setting up your Safety Net? What are some of your successful side hustles? And how cash or safe investments do you set aside for liquidity?