Earlier this summer I found myself in need of $75,000 in cash that I didn’t have.
Finding $75,000 in a tax-friendly / investment-friendly / retirement friendly way created some cash flow adventures.
Cash Flow Adventures (in early retirement)
Many years ago I shared an example of Cash Flow Management in Early Retirement but recent adventures are worthy of another look at this important topic.
Like many early retirees, we spend more than our portfolio generates in free cash flow. After all, in theory we can spend 4% of the portfolio but dividends on the SP500 are around 1.6% and interest on the 10-year Treasury is still only ~3% (after a jump from ~1% just a year or so ago.)
We have a $25k gap built in to our budget (~$75k income / ~$100k expense.) The delta comes from selling stock.
Since we don’t really have an emergency fund, anything unplanned or unexpected can sow a bit of chaos.
We had some unplanned* expenses. These were all all related to home ownership. Funny how that works.
First we had some leaking windows to replace. Then an HVAC system (upgrade to heat pump.) Total cost: $20k.
(* well… the timing was unplanned. I had this on my to do list but forgot to set the funds aside in advance.)
Normally I would just sell some stock… But selling stock is not always desirable or convenient. Who wants to sell when the market is down 20%? (market timing, anyone? Had I planned better I could have sold in December or January….)
But a 20% down market also created an opportunity… I could contribute to Roth accounts NOW at a discount vs EOY (probably) and the rebound would be 100% tax free.
Total contributions: $20,500 solo-401k and $12k his/her Roth IRAs = $32,500.
Add to this our $25k budget discrepancy and I needed to find $75k+ to get through the summer in the best possible way.
Often when I start thinking of ways to make money, I recall those old Smith-Barney commercials, “They make money the old-fashioned way… They EARN it.”
And a good way to earn some extra money is through bank and credit card bonuses.
I was able to get $225 by opening a new checking account with Chase and another $400 with Wells Fargo. The Chase offer is now $300 and we just opened an account for Winnie. I also got 75,000 Ultimate Rewards points by opening a new credit card ($750 minimum value, more like $937.50+ when booking travel.) This will reduce our fall vacation spending so is as good or better than cash.
$1,862.50 down, $73,138 to go.
Next, I actually did sell some stock, but only enough to fund our retirement account contributions.
Just before we entered the US about 1 year ago, I made a rather large capital gain harvest (paying some tax in the process.) This gave me a large source of funds at full basis that I could tap into without impacting our future taxes or ACA subsidies.
In total I sold ~$32,500 worth of stock, transferred all of the proceeds to our Roth accounts, and then bought $32,500 worth of stock. Our allocation is basically the same before and after (Sold total market fund and bought SP500 fund to avoid wash sale rules), just with more funds in tax-free accounts. (See Legal Money Laundering for more details.)
I realized a $4k loss on the sale, $3k of which will be claimed on our 2022 tax return and $1k on our 2023 return.
Special note: I’m not sure I will actually have enough earned income this year to make a full $32,500 worth of contributions to retirement accounts, but thanks to IRS math I won’t have to.
Lastly, I turned to debt, borrowing a bit less than $40,000.
Where possible, first I ran all of our spending through credit cards to earn points. We earned 2% to 7.5% on all of these expenses.
Then I transferred all of the credit card balances to another card offering 0% interest for 18 months with a 3% balance transfer fee. This is an effective 2% APY, less than or equal to what we earned on the spend. In theory I could have done better by putting all of the spend on cards that offered 0% interest directly, similar to what a much smarter reader did: How I Borrowed Over $250,000 at 0% Interest, it just didn’t fit with our timing.
Where I couldn’t use a credit card I wrote a check from our HELOC. This has a fixed rate of 5.24% which is more than I want to pay so I am in the process of transferring this debt to 0% cards.
All of this debt will come due around December 2023. If the market is up by then I will sell some stock to pay everything off. If not, I will roll it over or pop it on the HELOC.
Break even point
I borrowed about $40k, some in my HELOC and some on 0% credit card offers (with balance transfer fee.)
The alternative was selling some stock when the market was down ~20%. As long as my costs don’t exceed $8k this will be the cheaper option (20% * $40k = $8k.)
I am borrowing most of the funds for 18 months at 2% APY. If need be I will use my HELOC (5.24% currently, but if the Fed raises rates it will increase.)
Using simple interest math with interest only payments via HELOC I can wait up to 4 years for the market to recover and still come out ahead.
Worst case – 4 years from now the market is down (or down more.)
I needed some funds, the market was down 20%, and being a reasonable person I rationalized why taking on debt was a better choice than selling stock.
I earned a little extra funds, “laundered” contributions to our Roth accounts in a down market, and used debt for the rest to wait out the markets return to all time highs.