Protecting Your Cash Flow (Part 1): How to Build a Personal Financial Fortress

You can be a high earner, maxing out every tax-advantaged account, and still be financially vulnerable. 

In this episode, I explain why many HENRYs feel like they’re living paycheck to paycheck — and why that’s often normal, but not always safe. We’ll unpack the risks of having too much of your money locked up in retirement accounts and home equity, especially in a job market where unemployment can last six months or longer. 

You’ll learn why the standard “3–6 month emergency fund” often falls short, how aggressive mortgage paydowns can weaken your liquidity, and what it really means to build a Financial Fortress that protects your cash flow when life doesn’t go according to plan. 

I also introduce the framework behind my free tool at www.fortressf.com, designed to help you evaluate your short-term financial resilience. 

This episode is about strengthening your defenses — so your long-term plan actually works. 

Transcript

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Today's episode is part one of two episodes where we're going to be talking about something very important about really making sure that you are financially protected if you should happen to lose your job. So understanding your liquidity and cash flow. So in today's episode, I'm going to be talking about understanding your cash flow needs and what resources you have available to access. And in the next episode, I'm going to be interviewing attorney Emily Catania on helping you guys better understand your employment agreements, like your severance agreement, which may already be inside your employment contract with the job that you currently have. Are you guaranteed a severance if you lose your job with them? Or is that going to be determined even when you actually lose your job? And also understanding your non-compete agreement if you have one in place or what you should look for and possibly negotiate when starting a new job so that you are protected in your industry if you switch jobs, whether by choice or not by choice, are you able to continue making money in the industry that you know best and understanding what may or may not hold up in core? So let's get into today's topic. Now, a lot of you Henries out there, you have a high income and you are working on building your wealth. And many of you may feel like you are living paycheck to paycheck, which is totally normal. Money comes in, you are spending most, if not all, of your take-home pay. And it may feel like you're not saving any money, but hopefully many of you, in fact, are actually saving and investing a lot of money via your 401k. And maybe you are also doing some Roth IRA contributions or traditional RA contributions, putting money in your kids' 529 plans. Maybe you have an FSA or HSA that you're funding. And I love all these things. They have amazing tax benefits, but it can make you feel very cash poor because these are funds that you typically cannot access, at least not without penalty, prior to age 59 and a half for retirement accounts. And so it leaves a lot of illiquidity in your life if you have little to nothing outside of your retirement accounts and you have a major disruption in your cash flow, namely loss of a job. Or maybe you have a large, unexpected expense come up, or maybe you choose to leave your job. You want to take some time off, find another job, or maybe start your own business. And you need to better understand what your runway is. How many months can you get by on the assets that you have readily at your disposal for having to really start bringing in more money or do something very drastic like sell your home? We want to put up what I call a nice strong financial fortress to really protect you in these periods of partial or temporary unemployment. And so I think this is really critical. And it's something that I am very passionate about because I feel that the wealth management industry as a whole, most financial advisors are really focused on the long-term, the long-term projections. Are you on track for retirement? Are you on track to fund your kids' college goals? All of those long-term things, which don't get me wrong, that is super important. I focus on that a lot with my clients as well. I feel that what gets left behind a lot is understanding the short-term risk and really preparing clients for that possible job loss. And a lot of financial advisors or just regular advice out there says make sure you have that three to six month emergency fund liquid, which I think is great, making sure that you can cover at least three to six months of living expenses. If an unexpected large expense comes up or you do find yourself out of a job. However, I have seen personally in this crazy job market that we are in with a lot of government layoffs that have been happening over the past year, plus a lot of tech layoffs. I personally know multiple people that either are currently or have been, but are now finally employed again, were out of work for more than six months. And that is really scary because when you have a mortgage to pay and you have kids at home and you have a lot of financial responsibilities, how are you going to cover those expenses? It can be very scary. So to address this issue, I created a tool, an online tool that I'm really excited about and would love for you guys to check out if you have a chance. It is a free tool. No information is tracked. It is www.fortressf.com. So the word fortress, the letter F.com, to help you better understand what your financial runway is. And so as I talk about these pieces, these are all inputs in the calculator, but I want to talk about it so that you can better understand it as well. So thinking about liquid assets that you can access without any major repercussions like having to sell your home or having to pay huge early withdrawal penalties on retirement account distributions that you take out prior to age 59 and a half. So understanding how much you have in your checking and savings account, understanding how much, if anything, you have in a taxable brokerage account. So if you have money invested outside of retirement, that is excellent. And you can enter that number into the calculator. And it may very well be invested for the long term, which I'm a huge proponent of. We don't want to keep too much money in cash. We want to have that emergency fund and we want to have liquid assets for any big financial goals that we have in the near future, like if you are looking to buy a home in the next couple of years to have that down payment money liquid in cash, not at risk of the market. But we also want to make sure that our money is for the most part working for us. So having money in a taxable brokerage account that may be, again, invested for the long term, but you can access it sooner if needed. Another component of this is I often recommend to my clients who are homeowners to get a HELOC, a home equity line of credit on their home. Do not draw on it. It's there just in case you do need to access equity in your home if that job loss comes along. Because yes, it is a loan. It does have to be repaid. There is interest on it. But borrowing from your home equity is something that is going to be much more affordable to do than taking on credit card debt. Because many credit cards out there have interest rates of 25% or more. And that can really get you into a dangerous debt cycle. So understanding your ability to borrow from your home. And again, this is something that you want to get in place before that job loss because you may not qualify to get a home equity line of credit on your home once you've already lost your job because you need to, it's it's very similar to getting a mortgage. You need to prove that you have income and are able to repay it. So getting that home equity line of credit in place before you lose your job so that you can have that as just a tool available to you if you happen to need it. Then, of course, you can also access your cumulative net contributions to your Roth IRA account if you have a Roth IRA. And this is also a wonderful resource. Now, again, definitely I would not recommend rating your Roth IRA just for the fun of it, to go on vacation, to get a home renovation. I really want you to keep that money in the Roth IRA long term if you can because of the huge tax benefits. But it is important to understand that you can always withdraw your cumulative net contribution to your Roth IRA without penalty and also without taxes if needed. So, what do I mean by cumulative net contribution? I mean that the total amount that you have contributed to your Roth IRA over the years, net of any distributions you may have taken out, you can always take out without taxes or penalty. So, for example, let's just say that over a three-year period, you contributed a total of $15,000 to your Roth IRA, $5,000 a year over three years, never contributed before that, never contributed it again. Maybe years later, that Roth IRA is worth $50,000. I'm just making up these numbers here as an example. You can always withdraw up to $15,000 from that Roth IRA without taxes or penalty. So a great tool in that toolbox if something happens and you need to access some cash. Because if you again withdraw from a traditional retirement account prior to age 59 and a half, the full amount of your withdrawal is going to be considered taxable income and you owe a 10% early withdrawal penalty on that distribution. So bad consequences, definitely something you want to avoid doing if possible. And then in the calculator, I have you enter your monthly take-home pay for both you and your spouse. If you do not have a spouse, you can leave that part blank. And then you put in what your monthly spending is on a normal budget. And then also what your spending could be on a tightened budget. You want to use something realistic here. So, you know, you're probably not going to just up and sell your house or move to a cheaper apartment immediately if you lose your job because you're hoping to get a new job soon, get that income going. You don't want to make major drastic changes to your lifestyle on a whim. So if you just cut back a little bit, maybe don't buy any new clothes, go out to eat a little bit less, and how much can you be spending a month on a reasonable but tightened budget? And then you click calculate and it shows you what your runway is, given all of those different liquid resources you have, how many months you can get by if A, you were to lose your job, B, your spouse were to lose their job, or C, both of you were to lose your jobs. How many months could you get by on your liquid assets, whether it's on a normal budget and it also shows it on a tightened budget? Now, if that is looking scary, the results are something that you're not happy with. Don't freak out. That is totally normal. I know my husband and I were not in great shape in terms of this financial fortress. Our runway was probably quite short for most of our 30s and I'm sure all of our 20s. And now that we're in our early 40s, we have been able to fortunately build up more and more outside of retirement to build that strong financial fortress. So this is not a tool to scare you. It is a tool to inform you. And I also just want to make clear this is not a retirement calculator. This will not give you any information about whether or not you can retire. This is purely a tool to help you understand how protected you are if you or your spouse were to lose your job, or again, if you are looking to leave your job, start your own business, or take some time to look for another job. What is your runway? How long can you get by without income? So, what you can do if your runway is not looking too great is start to find ways to build it up and build up those assets outside of retirement, ideally in a taxable brokerage account for most of you. So that may mean not maxing out your 401k. Ideally, you would still be contributing enough to your 401k to get your full employer match, but maybe putting in a little bit less so that you can start building up some liquidity beyond your normal emergency fund. Because all of the advice out there, which in most cases I'm really in agreement with, that you want to take advantage of those tax advantage accounts, maxing out your 401k, your IRAs, those 529s, all of those great tools. But that advice is really based on everything going to plan. And that is just not real life because it's not going to be helpful to you if you have a huge 401, but nothing that you can actually touch without penalty if something should happen. I think it's also really important, even if you do have amazing job and income stability, to start building up assets outside of retirement so that you can enjoy your life more and have more flexibility. So again, many of you high earners have very little wiggle room each month in your budget. So if you want to take a vacation, if you want to do a home renovation, if you want to do something beyond, many of you feel like, oh my gosh, I have to save up money, even though I have all this money in my 401k. You may have a lot in assets, you may have a high net worth, but you don't feel like you have any money that you can actually access. So starting to build up more money outside of retirement has many benefits, giving you more flexibility so that once you do have that strong financial fortress, you feel like, hey, I want to do that bathroom renovation I've been wanting to do for the last five years. Just take the money out and spend it. Hopefully, making sure that you still have that strong financial fortress left after you take that money out. Now, another piece of this that helped me think about creating this tool was I had not one, but two separate clients within a week or two of each other, both of them got a large inflow of cash. One was from a large equity vesting at his company. The other client, she inherited money, and both of these sums of money were in the low to mid six figures. So a nice chunk of change. And both of them separately came to me saying, Hey, Carla, I got this $200,000 in cash. And I was thinking of paying down my mortgage. What do you think? And both these people do have a relatively high mortgage rate than those of us that bought homes several years ago when mortgage rates were much lower. And I think that was a big piece of this too, feeling that their six or seven percent mortgage rate was very high. They don't want to be paying so much in interest, they want to start paying it off. And I totally understand the thinking behind that. But what I started talking to them about was before I even built this tool, building that financial fortress, that if you take all of your money outside of your retirement account to pay down your mortgage, that's not going to be something that you can utilize if you were to lose your job. Now, this one client was married, but he was the sole breadwinner in his marriage. And the other client was single. So there was really no wiggle room, no extra income coming in if either of them were to lose their jobs. So making sure that you have assets and that it's not all tied up in home equity. Because so, first off, neither of these people would have been able to fully pay off their mortgage with this inflow of cash that they got. But even if they did, that does not solve the problem of making sure they have enough money to live off of if they were to lose their job. Because yeah, if you lose your job and your mortgage is paid off, your first instinct might be, okay, phew, at least my mortgage is paid off. But then you realize you have all of these other bills to pay: property taxes, utilities, food, gas, all of the necessities that we need in this day and age to get by. And if you have spent all of your money to pay off that debt, you're not actually in a very strong financial position at all. And I think it's really important to realize a couple of things about mortgages. So, number one, even if you do feel like you have a high interest rate, you can always refinance if and when interest rates go down. But more importantly than that, you can always pay off your mortgage later. It's really hard to undo that. So let's say you build up a really strong financial fortress and then another really big bonus comes in and you say, you know what, I really just want to pay down my mortgage. It makes me nervous. It's that's usually not my advice to pay down the mortgage because usually even if you have what you feel like is a high mortgage rate, which I think would be around six or seven percent. I don't think I've heard of anything near eight percent. But in the stock market, you can be making on average about 10% a year if you have an all-equity portfolio. So if you have, say, a 6% mortgage rate by taking money and investing it in the stock market, you're getting 10% versus that 6% return by paying down debt. Now, I realize it's not as black and white as a 6% return versus a 10% return, because paying off your mortgage is a guaranteed return of say 6%. Whereas when you put the money in the stock market, again, if it's an all-equity portfolio, there's going to be a lot of volatility and ups and downs. But over the long term, we can see that 10% return. So really making sure that your money is best working for you. But again, really easy later once you've built that really strong financial fortress. If you get additional money and you just really want to pay down that mortgage, then you're going to be in a much stronger position to do that versus taking, you know, every cent you have, maybe aside from that three to six month emergency fund and using it to pay off your mortgage because that's going to put you in a much harder financial position. And it's really hard to take equity out of your house, especially if you don't have a job and that income to show the bank. Anyhow, I'm really excited about this financial tool. I hope you check it out. Again, it's www.fortressf.com. And my hope is that maybe it helps you rethink things a little bit from all of the traditional financial advice you see online. And I wish you the best of luck building your own financial fortress. Again, tune in again for the next episode where I will be interviewing attorney Emily Catania to really dig into all the things that you need to know about your employment agreements.