The War Chest and Taxable Accounts
The war chest is a business tool for handling rapid shifts. As I have the potential for immense income, I focus on my war chest instead of an emergency fund. That way I can better capitalise on opportunities that arise, and better run my household like it's a business.
The difference between an e-fund and a personal finances war chest is largely a trick of perspective. You think about them differently: emergency funds are hands-off, until you need them. A war chest requires active engagement as it is one part of efficiently deployed resources. You're looking for opportunities to use it. As such, I keep my war chest funds in taxable accounts to have ready access to it.
What is a war chest?
Also known as a cash mountain, the war chest serves two purposes for a business: it's a buffer for expenses, and a tool for pouncing on opportunities.
In the business world, cash is king. Those with cash piled up in a war chest can handle the rapid shifts in the economy, whether by protecting themselves or taking cash-in-hand bargains.
Those bargains often come in the form of buying up floundering businesses that lack their own cash reserves. Though for smaller businesses, it can also come in the form of buying up deeply discounted capital goods from liquidating businesses.
In personal finance, your war chest is handy for securing deals. Cash offer on a house? Gives you a strong point of favour for closing. Stock market crash? Time to buy low! Construction suddenly cheap? Redo your kitchen.
Of course, every time you deploy your war chest for a bargain, you're increasing the risk of not being able to handle a disaster. Say the stock market crashes, you buy the dip, then you lose your primary income stream. You're now in a predicament!
This split of double duty is why I like to pair my war chest with an operating fund. An operating fund handles expenses that occur on short time frames, and it's part of what I consider to be my emergency fund. That frees up your war chest to focus on gains, instead of protecting you from losses.
Operating funds, war chests, and my household's capital deployment
In a previous article I focused on finances within my relationship, but I did not go into detail about the funds themselves.
The operating fund is the starting point for our finances. We target cash-equivalents for 3 months of mandatory expenses, which is significantly less than the 3-6 months of total expenses recommended for e-funds. We keep it in our credit union checking account.
We also keep a line of credit open, in the form of a cash back rewards credit card with our credit union. A lot of our expenses outside our mortgage go on this, to give us a small discount on the face cost of things.
Then we have our war chest. It's currently in the form of a taxable brokerage account with Vanguard. This is where we dump nearly all of our free cash flow. The war chest's goal is to either attain FI or to handle dire emergencies, but thanks to margin loans it can also be used to capitalise on market downturns:
Over time this arrangement will become more refined. For instance, I foresee splitting our war chest account out from our FI account once we reach financial independence.
Then the war chest's goal can be properly for investing in bargains and accomplishing some of my many operating goals – such as building businesses and estates.
Only after achieving FI will I shore up our operating fund into a proper emergency fund. A common reason for having an e-fund is to protect from losing an income stream, but because our time to FI is so short and we have several incomes it doesn't make sense for us.
We've already validated that our approach works to get us through our first life emergencies:
Last year my partner resigned from his job. Then early this year, my dearheart was in and out of the hospital racking up bills, plus a hefty $7,500 in legal expenses. Getting slammed with all those bills at once hurt, atop our mortgage, an expensive computer upgrade, and our regular expenses.
We managed to float the fees with a cash-back credit card and our multiple incomes – it was a tense couple months where I worried that I'd need to liquidate some stock out of the war chest, but in the end it proved to be within our regular cash flow. We paid no interest, thanks to the credit card cycle affording us the time to scrounge up our income and pay it off.
Why invest instead of carrying cash?
Personal finance proponents widely encourage adopting emergency-funds, and overwhelmingly prefer cash. This is the usual "three to six months living expenses in a savings account" advice.
However, I've found that this advice doesn't suit my household for our accumulation phase.
As I mentioned above with floating through sudden bills with high-interest credit and multiple income streams, I'd rather sprint towards financial independence than adopt a safety mindset. Therefore I put everything into investments, to get that lovely "time in the market."
This approach is definitely not for everyone. There are a lot of factors at play here, and this risky approach is based entirely on my household's situation.
The biggest factor is that I'm incredibly young with an immense income potential. Long time horizons mean that I can afford to take greater risks than those older than I, as the extra time allows me to recover if risks don't pan out.
The second biggest factor is that we run a tight household with low overhead. Our multiple income, no kids relationship means we have little in the way of mandatory expenses – just housing and groceries, both of which are much cheaper without dependants.
This is also why we can risk using a debt cushion instead of an emergency fund. Our multiple income streams allow replenishing our accounts in short order, simply by suspending investments and discretionary spending for a month or two.
However, there's a counterpoint to using debt. Credit cards can be closed and loans recalled when you need them most.
Look at the 2008 financial crash and the discipline necessary to coast through several years of downturn. If you rely too heavily on debt to finance your life, you'll be lost when it all dries up during a downturn.
This in turn leads to needing to pull out money from stocks during a downturn, which is of course, buying high and selling low. The opposite of what you should be doing.
As mentioned with the first factor though, this risk is one that I'm young enough to bear. My lifetime wealth is such that risking tens (or hundreds) of thousands of dollars now is a drop in the bucket over my lifetime. I'm not afraid of making mistakes – I know some will inevitably happen. I also know that I will recover with time.
Another factor that I cherish is the fact that since I married my dearheart, I've gained access to his parental safety net. Since my mother passed away, I don't have nearly the same kind of familial support.
Having a place to crash during emergencies is invaluable, not to mention having our mom come over to help when times are tight. Familial help isn't just tangible cash, but also in intangibles such as reducing mental burdens.
All these factors add up to make it easy for us to weather emergencies that last less than a year whilst still maximising our investments. However, once our priority changes for our war chest, so too will our asset allocation.
Instead of growth at all costs, our war chest will shift to a portfolio heavily weighted with cash-equivalents once we hit FI and exit our accumulation phase. This is because control is crucial to our eventual success.
Why focus on taxable accounts over retirement accounts?
It's all about control.
I love control, and as a dominant woman that should surprise no one.
Cash gives you control. It's the source of relief people talk about in having a large emergency fund. With cash you can easily pivot when circumstances change to take advantage of opportunities. It's highly liquid and has no strings attached.
My next best thing to cash in hand is taxable brokerage accounts. You still have control over it and few strings, unlike retirement accounts which come with all sorts of complicated rules and penalties.
When you're facing a crisis, you'll want the simplicity of withdrawing money and not worrying about finessing rules just right to avoid penalties.
I also view paying taxes as one of my personal duties to society. My parents raised me with the adage "to those that much is given, much is expected."
My privilege in talents and income potential deserve to be shared with the people of the world, and taxes are one way of doing so. As such I view minimising taxes as an ill-fitting strategy in the recipe of my financial success.
I am beyond lucky and privileged to be in a situation where I need not worry about the efficiency of my finances. I'm not planning on scraping by with a family and kids on a $30k income. I don't need to employ efficiency tactics fit for scarcity. FIRE is not a race, after all.
Instead I find myself caught in the torrential fortunes of a waterfall of wealth. I will happily pay steep taxes, because there's more than enough money to be had. I am glutted, sated, and happy to share.
Emergency funds are all about peace of mind. However, they're a passive tool. You're supposed to keep hands-off and save them for emergencies.
I prefer to find my peace of mind through active tools, namely by running my life like a business: with multiple income streams and a debt cushion. This frees up my capital for a war chest, which will eventually be my tool for amassing an abundance of wealth.
Currently I'm in the accumulation phase of my life, but give me a few more years and we'll see if I hit FI and pass into the operating phase of my life. From there I can help others.
In the meantime, I can help others by paying taxes with the taxable accounts under my control. Though you'd best believe that I'll be keeping an eye out for an opportunity to arise to use my war chest.