Liquidity, the #1 Money Principle

Key Takeaways

  • Always keep enough in readily available accounts to pay three to 12 months’ expenses.
  • Don’t borrow recklessly. Follow the “five tiers of liquidity” principle when you need access to cash.
  • Before tapping into insurance policies, brokerage accounts, retirement accounts and home equity, be mindful of taxes, capital gains and the timing of your withdrawals.

In 1954, when our firm’s founder, Ed Coyle, was starting his career, he had one child and another on the way. But Ed’s mentor told him to get a $5,000 bank loan and put the money into a savings account so he would always have cash available as he started off in business. Five grand was a lot of money back then. But his mentor always said, “Liquidity is one of the most important things [in life] and a key principle of money.” He meant that you need to have readily available cash at all times so you can seize opportunities, accomplish your goals and avoid undue stress.

And that’s why we recommend to our clients that you have five tiers of liquidity set up and that you know exactly where your free cash is as you move forward in life.

  • Tier 1— Always have enough cash readily available in your checking, savings, money market account or short-term bonds to pay for basic expenses for three to 12 months.
  • Tier 2Home equity, cash value life insurance or your 401(k). You can borrow against all of these accounts, but there ARE some costs involved. They’re still pretty liquid but not as optimal as Tier 1.
  • Tier 3Borrowing against brokerage accounts. At this level, you’re borrowing against hard assets in the market (or collateralizing them at the bank) because you don’t want to sell them. There’s a little more cost involved here, but it’s better than having to sell those assets.
  • Tier 4Selling stocks, long-term bonds and exchange-traded funds. Sure, you can sell these assets, but if the market’s down 10, 20 or 30 percent when you unload them, you’re facing a big opportunity cost, plus capital gains and taxes. It’s not the best option. Credit cards and auto loans fall into this tier. Again, there are more costs involved than in Tiers 1 through 3, but at least there’s some liquidity.
  • Tier 5Taking distributions from qualified retirement plans, IRAs and 401(k)s. You want to avoid this option if possible. If you’re under age 59½, there’s a 10 percent penalty on ordinary income. Essentially half of that money is going away, not to mention the opportunity costs if the markets are down when you take these early distributions. This approach can really damage your overall investment portfolio.


So, we recommend that you set up these five tiers of liquidity in the order described above, since you never know what’s going to happen going forward in life. This is all about your cash flow, balance sheet and taxes.

Contact us or your other trusted advisors if you or someone close to you is concerned about liquidity. Just like Ed’s mentor, you always want easy, low-cost access to cash at all times for peace of mind.

Until next time, enjoy.

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