My Dom friend's heart raced when I told him how much cash I kept on hand. He lived through the 2008 crash, and proclaims "cash is king."
I'm living on the razor's edge with cash flow, taking risks in my youth with the hope that they will pay off. If they don't, I also hope that my youth makes for time enough to recover from any mistakes.
Yet for a weathered and conservative mentor like my friend, those risks are wild to consider. He believes that I should keep a 2 year emergency fund, rather than the 3 month bare-bones operating fund and debt cushion I use.
Debt cushions like credit cards and HELOCs are apt to vanish when you need them most during economic slumps – though I'm still waiting to see if the pandemic and Russian war will cause any credit to be recalled. Thus far it appears mostly that new lines of credit are on hold, but not much has been recalled.
Taking on debt before or during downturns is a risky bet, based on the hope that the downturn is shorter than your cash runway.
In the past I've written about the urge to take on debts up to your capacity during prosperous times. That's how people break the back of their cash flow and bankrupt themselves.
Why do I do it though?
Because I'm in my accumulation phase, and I'm sprinting to financial independence as fast as I can whilst still maintaining control of my assets.
Debt Cushions and Cash Flow
I like to work in terms of smooth numbers and averages, not the discrete and chunky reality of cash flow. That's why I'm thankful for debt cushions like credit cards.
I don't worry about waiting to buy things after payday. I don't know how much is in my checking account most of the time. I don't keep cash sitting idle in my credit union accounts.
I trust in the process instead: during the month I accumulate charges, as well as income. Then I rebalance the money at my convenience at the end of a month in one fell swoop. It's respectful of my limited time and attention that way.
Debt smooths out the cash flow into something manageable and predictable, especially when one swallows huge bills whole.
Cash Flow Woes
Speaking of huge bills we've had to swallow whole, this season has been an interesting example of cash flow woes for our household.
First was leveraging $10k to buy the dip in January. If you're not familiar with buying the dip using leverage, I introduced the topic here:
In short, it's where you take a margin loan to buy "discounted" stock during a market dip.
All things considered, $10k is not much within the context of my finances.
Then I financed an automobile for another $30k. Yes, we could have paid out of pocket... but with inflation up and interest so low, why should we?
This debt is more manageable than eating an upfront cost, especially if we can keep getting stock market gains in the meantime. It's using a debt cushion instead of needing to keep stacks of cash on hand.
Then to top things off for our cash flow, we got hit with a $25k tax bill.
This has been the first stumbling block I've run across with our low cash reserve lifestyle. We can't exactly pay off a tax bill like that with credit cards.
We had saved a portion of our capital gains for tax season, but clearly not enough – there were some complications, and I didn't not know how much to expect to be hit with.
My Dom friend and I made bets, he guessed I would owe $10k and I guessed $15k. Sadly neither of us were even close.
Yet these are only cash flow woes, not truly an emergency. What would be an emergency is losing my primary income. For that case, my best chance of resilience is not in having a pile of cash to burn: it's to reach financial independence sooner rather than later by investing all my money.
Investing Your Emergency Fund
A major part of my risky behaviour is that I don't have an emergency fund outside of our operating fund. Our operating fund pays for the mortgage and gives us enough runway to liquidate assets in an emergency.
The hands-off nature of some stashed away cash e-fund is not in my interest. I focus on my war chest instead:
In brief, the war chest is all about actively hunting for ways of growing your assets. It makes sense that during my accumulation phase, the focus is on investing in stocks than keeping a mountain of cash sitting around idle.
Once I attain financial independence though, that will change: the mountain of cash will be the main war chest, ready to be deployed for emergencies and investment opportunities alike.
It's a deliberate choice to sprint to FI and invest all my funds, instead of leaving behind a few thousand for emergencies. For the most part, until now, we've not needed the cash on hand to tackle anything.
There's a metaphor about buckets: for me, I'm trying to fill up my financial independence investment bucket before it overflows and I fill up my emergency fund/war chest bucket.
It's not for everyone to invest your e-fund money – in fact it's usually a rather poor decision. Most people don't have the ridiculous advantages I do that allow us to skate this razor edge of finance.
For most people, filling up your basic e-fund bucket with cash equivalents is the way to go. Then, afterwards, you invest your excess cash for financial independence.
By the way, the war chest doesn't get burned on normal purchases – that's what sinking funds are for:
With sinking funds we allocate portions of income to different funds to pay off our big purchases.
Risk Tolerance and Low Overhead
Ultimately there's two factors that my lack of on-hand cash comes down to: I have a high risk tolerance in my youth, and I keep low overhead with lots of cash flow by being a MINK household:
Having no dependants is why we can scrape by. Our time and money isn't dedicated to a huge project like raising kids. Our overhead is thus lower, with only housing and food costs really to contend with.
There are other tangential features of our life as well: I work from home, so transportation costs have been minimal for years now. My work insurance covers most of our medical bills, because we hit the high deductible early in the year – and we've only had a few large emergencies so far.
The other half of why I don't keep cash on hand is my risk tolerance: I know that by being young, I can take more risks.
That's because my time horizons are decades long, and there's more time to recover from losses. Any losses can revert towards the mean with time, and I can simply delay my full retirement date.
With time I know I will temper my risk tolerance to something more reasonable. My accumulated assets shall grow until I'm secure from long term job loss, and then I will be able to hold more cash instead of purely ETFs.
Until that day, I'm focused on sprinting to Financial Independence and investing every drop of money I can afford.