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.
The Unplanned
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.
Alternative Funding
Earn it
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.
Sell stock
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.
Borrow it
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.)
Summary
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.
I find this an interesting post because it is the first post you have made where I have a notably different perspective.
If you look at stocks in the last 5 to 10 years we are still massively up.
I don’t see the selloff this year as that dramatic (yet). I’m not sure I’d make the bet with the debt. I guess we have discovered I’m more risk averse than you.
Cheers!
Short term you are most likely correct.
Will the market be up or down in 10 years? I can float it all until then
If I am wrong it is all a small part of net worth anyway
Makes sense.
Also beware of anchoring bias where you are anchoring on the all-time high at the beginning of this year. Had the markets moved up modestly last year and again modestly this year and current levels were the all-time high, you would probably be comfortable selling….
That is certainly possible.
I think there are 2 other angles we could use to analyze if I’m suffering from anchoring bias.
– I sold a million dollars worth of stock in 2021 and moved it into real estate and cash because I thought the former was overvalued relative to the latter (both markets crazy though.) Just glancing at a chart now… I sold around SP500 at ~4400 and it is currently ~3900 (inf adjusted maybe 3500.) If market was at 4400 today I would most likely be comfortable selling (and almost did in August at 4300 but I was busy with other things.)
– I did all of this in June when the market was down 20%. On 40k of debt I’m “up” about $4k vs not selling at the bottom even with the 4% drop a few days ago.
(seems a bit of hassle for $4k, but then again we are going to Disneyland this fall and that will cost about $4k.)
But like I said in the conclusion.. I’m totally rationalizing :)
You’re basically saying worst case scenario you’re going to pay 5.4% on the HELOC while potential rise in the stock market will be more than 5.4% over time.
yes, precisely. But also… inflation is greater than 5.4% so my borrowing costs are not as bad as they would seem at first glance.
I have a question about HELOC loans.
If I take one out ( to buy a house ) and pay it down, how long do I have to take money back out at the initial fixed rate?
I ask because I have read of people basically using a HELOC as their checking account instead of making ZERO % on funds sitting in a checking or brokerage MM account.
A HELOC is a loan you get after you already have a house with some equity in it.
I have a 10-year draw period. During this time I can choose to pay interest only. The interest rate changes based on market rates.
At the end of 10 years it becomes a fixed 15-year loan based on rates at that time.
I also have the option to say I want $x NOW at current rates fixed for up to 15 years. For example, I can withdraw $10k from the HELOC and say I want the repayment on this portion to act like a 15-year fixed mortgage starting today. I did this on our HVAC system, locked at 5.24% (new borrowing is already 5.74% or maybe higher after today’s inflation report.)
How did you manage to get a HELOC without employment income?
We have a house with 80%+ equity and the max HELOC value I asked for is only 10% of their estimated home value. I assume that is the main thing – I wasn’t asked to provide any verification of income, so… not sure exactly how we qualified.
Halve expenditure and save?
The difference in living comforts between $50,000 and $100,000 is slight?
Similar effort to achieve savings as to shovel money about?
Possible in theory. I could sell the house and move to Florida (house prices 1/3.)
It’s all very clever and I’m sure gives some thrills. But it is basically using debt to market time / gamble, rationalized by saying that it is just a small part of your net worth.
IMHO not a “clean” way to live.
Wheeee
Even with yesterday’s 4% drop I’m up 10% vs selling in mid-June. Maybe tomorrow that changes.
Have you considered getting a margin loan from your taxable account? E-Trade and IBKR have very competitive rates.
I was discussing this on Twitter with some folks and it was a popular topic in the comments on our post about mortgages. Margin rates at Etrade have tripled in last few months (to 3.5% or something, but still.)
It’s not a bad option for short term cash flow purposes.
You could check local credit unions for good HELOC deals. In our area, some of the credit unions are still offering rates as low as 3.25% for a 60day loan.
My HELOC is with a credit union. What happens after the 60 days?
Hi Jeremy,
I’m a big fan of using every legal method in the book to keep riches in my pocket. Your methods are so palm to forehead obvious that I am surprised more FI people don’t take advantage.
You could just draw down your assets, and let the up years replenish your down years like most retirees or early FIRE people. Nope, how about use 0% APR cards, credit card bonuses, TLH or TGH, and loans to minimize selling stocks at a loss. Ha, love it. Good stuff.
Its certainly my theory that the rules are stacked in our favor for those who saved and invested. There is a reason the Jeff Bezos’s of the world can avoid paying much capital gains tax and instead borrow against their assets. Nothing wrong with us less well-funded FI-crazed stiffs taking advantages of the same systems.
One question though: do you intend to do the same during every bear market or recession? Seems like all upside to me, but I wonder if you charted out doing this 4 or 5 times vs a 4% drawdown if some finance tricks are more consistent than others over time. Guess you’ll have compare at the next down turn, hopefully many years down the road.
Cheers
I think each time is different. I’m more pro-debt that I would normally be because a) inflation is higher than my interest rates, and b) interest rates are so low
I probably wouldn’t borrow in a downturn if rates were 8%+ and inflation was zero
True enough. Conditions are ripe for it right now
We’ve been living with high inflation for so long at this point with no end sight, that it is starting to just . . . feel normal.
Like all money advice, it aways depends on factors that vary over time. Who knows what the future will hold.
I’ll be interested in one your next cash flow adventures posts when inflation finally eases. Bound to be other tricks to pull when we transition into whatever the next market era will be.
I have to echo some of the comments above. These debt schemes are not “clean” living. You’re probably right, you’ll come out ahead in the long run. However, the disclaimer should be that people doing this ought to have a very high net worth so that losing the sums you’re talking about wont matter much. Not for beginning FIRE people…fat FIRE only!
I don’t reach the same conclusion. Debt should be limited to a percentage of total portfolio, it is irrelevant what the portfolio size happens to be.
When you can borrow at rates less than inflation that is free money. Why reject it because somebody used a pejorative adjective? “Clean” is just another way of saying I could have paid 20% more for the HVAC while losing future dividend income. In the worst case I spend less with this approach.
Here is a disclaimer.