Finance, Side Hustles

Liquidity Ladder: Survive a Long Term Loss of Income

liquidity ladder, emergency fund
Photo Credit: Jay Wennington

We’ve all heard of emergency funds, let me tell you about the Liquidity Ladder. The Liquidity Ladder orders your assets by how liquid they are as well as what order you should tap into them in the event of an emergency, such as the sudden loss of your job.

Several days ago, I left my full-time job and primary source of income. The move is something I’ve contemplated for a while but I’m now officially unemployed. I intend to take at least a month or two off to enjoy my family before returning to work (this will be the longest break I’ve had in 16 years). However, if I wasn’t prepared, I’d be freaking out.

What’s This About Liquidity Ladders?

Below is the Liquidity Ladder. Work your way down the rungs. This is a general guide and you can re-order these rungs if it makes more sense for you to do so, but this should cover most scenarios.

Tapping into your retirement funds is the absolute worst source of capital; I’ll explain why later.

liquidity ladder, emergency fund
Source: MSoLife.com

Side Hustle

Everyone should have a side hustle. Having an additional source of income can greatly accelerate the paying off of debt and early retirement. I’m also including passive cash flow (dividends for example) in this rung. In an ideal situation, your side hustle cash flow is > than your expenses. If your truly passive income is greater than your expenses, you could technically retire now. Your extra income here is your first line of defense in an emergency situation. If you have a non-working spouse/partner, this would be a good time to also kindly ask them to start their own side hustle if at all possible.

BTW, you should absolutely file for Unemployment. I consider this “passive income”. I paid around $7-8k per month in taxes and Unemployment is laughable relative to that. There’s no shame in being on the dole if you’ve been contributing to that pot of money your entire adult life.

Sell Stuff

Now, before you start really digging your early retirement into a hole, sell all your extraneous shit! We all have it, even minimalists. I’m not a minimalist, but I’ve stopped doing things like buying $400 pens, so there’s that.

Use eBay, Craigslist, or an old-fashioned garage sale to make your junk useful. If you own collectables, gold, or other precious metals, sell this stuff now.

moose hound
Sleepy Moose Hound
Moose Hound got a side hustle delivering food with DoorDash via sled and narrowly averted being sold on Craigslist.

Cash

Next down on the ladder is cash. This is self-explanatory. Use whatever cash you have sitting in checking accounts first after your passive/side-hustle income.

Savings

Cash is followed by emergency funds and CDs (hopefully you’re getting better than 0.001% interest on those) as well as any other savings accounts. It should cost you nothing or next-to-nothing to free up this capital.

Brokerage

Next, start selling off stocks and funds in any non-retirement brokerage accounts. I have this low on the ladder because ideally you sell stocks when you choose to, not when you’re forced to.

Rarely is forced-selling something that works out in your favor. Somehow, you usually are forced to sell when you least want to. So do your best to avoid ever getting down here. Selling comes with transaction prices as well as potential taxes. Selling stocks sucks, especially if you haven’t held them for a year or more.

IF your brokerage portfolios contribute significantly to your passive income (you’re a dividend investor), move this further down the ladder. Cutting off yet another source of income is utterly foolish.

Credit

Some (like Mr. Money Mustache) advocate using credit cards and having your emergency fund invested instead. This certainly is a valid approach for a short term and non-repeating emergency. This also buys you time to access more illiquid capital to pay off the credit cards/HELOC later. However, if you start tapping into credit, beware that carrying a balance ACCELERATES your trip down the Liquidity Ladder.

Let’s say your current expenses are $3k per month. If you max out your credit cards and/or take out a HELOC (home equity line of credit), guess what? Your monthly expenses just went up. Given that the average interest rate on a credit card is around 18%, this is a bad move without the income coming in to knock the balance back down quickly. Increase your expenses accelerates your march to being flat broke, so put the credit cards down unless you absolutely need to use them.

Retirement

I showed you in the Money Multiple exactly how powerful compounding is over years and decades. If you have no debt, you should have been maxing out your 401(k) every year. This pot of money is likely a substantial part of your net worth by now.

If you are forced to pull cash out of your 401(k), it will have all sorts of nasty tax implications and you’re going to get back a fraction of what you redeem. This will grind your early retirement progress to a halt. However, this is preferable to being homeless, so grit your teeth and do it if you must.

Asking Relatives/Friends for Money

This isn’t even on the Liquidity Ladder because this is a creampuff move that should be an absolute last resort. If you’re reading this blog, however, I’m assuming that you’re responsible, respected, and a person of your word. If you absolutely must borrow money to keep the lights on, make paying back whichever kind soul helped you your first priority.

Wrapping Up the Liquidity Ladder

I hope the Liquidity Ladder makes sense and gives you a solid plan for what to do if you ever encounter a long-term loss of income or massive recurring expenses like medical bills.

By my math, I have well over six months before I have to start working again (not including 401(k) and IRAs). I’m going to use this time to focus on my family, keep improving this site with more spicy content, and learn some skills that will serve me well in life.

I’m now “temporarily retired” and I get to test out some of the ideas I had for my real early retirement. I’ll be exploring this theme more in my next post, stay tuned!

How does your Liquidity Ladder look? How long can you last without your main source of income? What are the best shows to watch on Netflix right now? 

If you’re new here, check out some of my other posts!

What’s Your Money Multiple? (also featured on RockStarFinance)

Geoarbitrage: Turbocharge Your Early Retirement

Social Insecurity

 

 

 

 

 

7 thoughts on “Liquidity Ladder: Survive a Long Term Loss of Income

  1. Definitely a great idea to have this plan in place! My perception, MMM’s advice to keep emergency money invested and use credit cards, was not advocating to pay interest, but you generally have at minimum 21 days from when you make the purchases, to when the cards statement comes available and the due date is up. The card allows for the perfect buffer time to pull the needed money out of a brokerage account to pay the card in full. All the while, for years that you hopefully don’t need the emergency money, it is making money for you as opposed to keeping a large cash emergency fund.

    1. Thanks Thomas, that makes a lot more sense. I’ve unwittingly highlighted the dangers of quickly skimming a post I read quite a while ago. Thanks for the great explanation! I’ll edit this post later today to avoid confusion.

  2. I’m going through something very similar. I lost my job four weeks ago and I’m relying on the liquidity ladder to cover living expenses for our family. Side hustle is first for us too. Then passive income from investments (dividends, real estate etc.). Then cash savings. My wife just sold a bunch of kids stuff at a church sale, but it’s not going to be much to support our family. Everything helps, of course.

    The rest of what we plan to do is about the same. Nice that you’ve put your plan into a readable ladder like this. I hadn’t thought it out as detailed when I became unemployed.
    -RBD

    1. Hang in there RBD. This FI life is thankfully makes us so much better prepared for this than most people. Glad you’re getting rid of some things too, it declutters the house beyond providing some money. Glad you found this useful!

  3. Don’t touch your money in 401ks/IRAs. Ever.

    Why?

    It’s bankruptcy protected. Which means you’re better off maxing out credit cards/HELOCs to the hilts (all of which can be discharged via bankruptcy) than EVER touching a 401k/IRA (which creditors cannot get to in the event of you going bankrupt).

    I’d even say mooch off of/move in with family before touching your retirement accounts.

    1. That definitely makes sense from a purely logical perspective. Maxing out cards and HELOCs is higher on the ladder because touching retirement accounts should be a last ditch act of desperation when all other avenues are exhausted. It depends on how you view being a burden to your family. For some, it’s absolutely not an option because they might not have any family left. The rungs on this ladder are not fixed, more like general guidelines. Thanks for commenting!

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