In a Crisis, Cash Flow Is King

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Hello again from the end of the world!

Ha, just kidding. It is not the end of the world. Don’t get me wrong, this is a very, very serious health crisis the world is dealing with right now, and everyone should be practicing good hygiene, washing their hands, and practicing proper social distancing, unlike these idiots who are deliberately going around coughing on old people because they think it’s funny. Morons.

I am continually amazed by how quickly the world can turn on a dime. Just a few months ago we were sitting on record stock market gains and debating on how much we should increase our equity allocation. Now, the streets of every major city is sitting virtually empty as the global economy screeches to a standstill. What a ride this has been.

But this isn’t a news blog, it’s a finance blog. And if I could use two words to describe the mood in the finance/business world right now, it would be “abject terror.”

I get it. The world’s stock markets are in free-fall, trillions of dollars of valuations have been wiped out in a matter of weeks, and nobody knows where the bottom is. Dow futures are regularly hitting stop limits, and we have seen multiple days of breathtaking, record-setting movements in both directions. In short, it’s starting to feel a lot like 2008/2009.

So are we panicked? Not at all.

I mean, don’t get me wrong. We’re not taking a blasé approach to the dangers of the coronavirus, and we are taking all the steps recommended by the WHO and the Canadian government to make sure we don’t get sick (and more importantly, we don’t pass the disease on to anyone else), but from a personal finance perspective we are going to be just fine.

Remember, the reason that we invest in the stock market is not just to grow our portfolio. The real reason we invest is to secure our cash flow.

Cash, after all, is what we use to buy groceries, to pay for rent, and to go out and enjoy life. ETF prices are just numbers on a screen, but if you don’t have a good way of converting that into cash, then you aren’t actually ready to retire yet.

That’s why while we talk a lot on this blog about financial topics and how to build a balanced, diversified ETF portfolio that will help you retire, equally important is how you turn that portfolio into cash, and how to do it safely even in times of crisis.

The Three-Bucket Strategy

Central to this is our Three-Bucket Strategy. We explained all the inner workings of this system in our book Quit Like a Millionaire, but just to briefly sum it up, you basically organize your money in retirement into three groupings, or buckets, like so.

On the left you have your retirement portfolio full of low-cost index-hugging ETFs. On the bottom right, you have your Current Year Spending. This the amount of money that you reserve for your rent, food, entertainment, etc. for the upcoming year. And finally, you have a seperate savings account for your Cash Cushion. This is a certain amount of cash you keep that will help tide you over during market downswings, like the current one we’re facing.

Remember that your portfolio returns money in two ways: the portfolio yield (or the Yield Shield, as we like to call it), and capital gains. In good times (like last year), at the beginning of the year you fill up your Current Year Expenses bucket by harvesting your portfolio’s Yield Shield, and selling off a few ETF units that have gone up in value.

In bad times, you fill up your Current Year Expenses bucket by again harvesting your portfolio’s Yield Shield, and also taking a year’s worth of Cash Cushion to make up the difference.

And when the good times later return, you use the extra capital gains of your portfolio to refill up your Cash Cushion so you’re ready for the next economic downturn.

Some have criticized this strategy of ours as being overly cautious, as it does keep some amount of cash out of the markets (though not nearly as much as you might think), but BOY are we glad we have this system in place right now. Last year when markets were red-hot, I refilled our Cash Cushion account back up to our target of 3 years. So right now, even as our investment portfolio is getting whipsawed like crazy, our 2020 expenses are already taken care of because we harvested our Yield Shield in January, and our refilled Cash Cushion will provide us another 3 years of cash flow, for a total of 4 years of living expenses already accounted for.

Oh and that’s not including any blog/book income, which while is nice to have, we don’t actually live off in order to keep our early retirement experiment as pure and relevant to all of you as possible.

So that’s what we did on our investment side to make sure temporary market dips don’t affect us. However, just as important is how we spend our cash year-to-year. I’m talking, of course, about lifestyle inflation.

Don’t Inflate Spending during Good Times

I get it. It’s super easy to look at a hot year in which your portfolio has gone up six figures and think “You know, I could really use a new Tesla right now…”

That would be a mistake. Remember, the 4% rule that FIRE is based on assumes that when you retire, you only increase your living expenses year-to-year by a rate not exceeding inflation. If you jump your living expenses up more than that, you may be increasing your chance of portfolio failure, or sequence of return risk as the finance nerds call it.

On this one, FIRECracker gets all the credit for the success we’ve had on this. If you look back at our annual spending summaries, you might notice that it somehow never goes about $40k. That’s all because of her.

She’s the one who takes all of our receipts every night and puts it into her magical spreadsheets. She’s the one that finds all the deals on lodgings as we travel the world with our two backpacks. And she’s the one that notices immediately when our spending starts to creep up and figures out how to get it back down.

As a result of her (and our geographically arbitraged lifestyle), we’ve not only managed to NOT inflate our lifestyle over the last 5 years of retirement, we’ve somehow sidestepped inflation completely. This has caused our portfolio to increase at a faster rate during the stock market run-up than we initially modelled, which is great because when the inevitable crash comes, you need every extra penny to weather the downturn.

Be Militant With Your Cash in Bad Times

And finally, when the inevitable crash does happen, it’s even more important to manage your spending even more.

This is actually turning out to be easier than I thought. One of the very, very, VERY few upsides of this coronavirus crisis is that it’s become surprisingly difficult to spend money. We enjoy our eating out, but that becomes kind of difficult when every single restaurant is closed. And as FIRECracker noted in the last article, the cost of AirBnbs in city centres have plummeted in value. We are able to pick up AirBnb’s now in downtown Toronto for less than a long term rental!

As a result, our spending has plummeted. In fact, if the worst case scenarios that the media are predicting come true and we remain locked down for most of the year, we are projecting that we will under-spend our budget by $5k – $10k. That has a profound impact on our cash position, because at that level of spending, it would actually allow us to INCREASE our Cash Cushion rather than spend it down. So somehow, the longer this crisis lasts, the safer our cash flow becomes.

Cash is King

There’s a saying in the financial world that in a crisis, Cash is King. Well, we are in a crisis and we’ve definitely found that statement to be accurate. All the financial wizardry in the world doesn’t matter when your fridge is empty. That’s why it’s so important to have a cash flow strategy as well as an investment strategy, because at times like this Cash really is King.

Stay safe, everybody. And no coughing on old people!

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42 thoughts on “In a Crisis, Cash Flow Is King”

  1. I think I’ve sworn off even looking at the market anymore. In the accumulation phase, with all my bonds already switched into stocks on the way down a week or two ago, it’s not like I can make any useful moves beyond shunting the usual tax-advantaged savings every two weeks.

    We’re oddly having the same experience with regard to spending money. We haven’t put gas in the cars yet this month, and grocery stores are out of a third of our target purchases so we’re getting creative and eating down the pantry instead. We’re plowing any money saved into massive tips for the carryout we get once or twice a week; our small businesses are a big part of why we love our little city, and we want to do our part to keep them around.

    1. Indeed! I haven’t looked at our accounts either…because it doesn’t matter really and all will come right eventually. BTW, I love the 3 Buckets visual!!

      We’re also still accumulating, but paused for a few months (no jobs, running on cash saved) to rehab a cottage for ourselves…started pre-virus. It feels great – we even were able to hire someone who wanted work -laid off, no income, with kids- to help for a week for cash. She went to a church for food. Next stop on my list is the buy-one-get-one aisle at the store to get them some groceries. We have Enough.

      Cash definitely is the ticket right now, not selling a thing out of the market.

    2. So. I’m wondering if anyone has seen estimates for how may people are sitting on a nice stash of cash?

      I ask because I remember reading last year that some folks weren’t investing because the market was “too high”. I mean individuals, not institutional investing. They’re waiting for a downturn. When I see markets drop and then bounce back, it makes me think of that type of thinking…jumping in when prices are low.

      If so, then I also wonder if it helps protect us from too much of a low. I guess I just get tired of all the doom and gloom…not everyone is riding on the turn of the market to eat. Some of us learned from the last time 🙂

  2. That 3 years of cash is looking genius right about now. Good move.
    Also, nice job keeping your expense under $40k. Lots of people inflate their spending during good times. It’s not easy to cut back.
    We’re trying to support our local small businesses so we’re spending more than usual.
    Stay healthy!

  3. cash is indeed king! if i had to name one cornerstone of FIRE it would be a robust emergency fund in cash when you’re on the yellow brick road to freedom. even though we’re not retired we’re also not young and a couple of years ago upped our cash position to 15% now that we have essentially “won the game.” we could live 4 lean years from our cash alone without even considering dividends and that is a good feeling. there are a lot of lessons to learn when the shit hits the fan. everybody can step back and take a deep breath and hopefully figure out what those are for next time.

    it’s an unusual thing about toronto, an international city on a scale near nyc. the outbreak is so much more mild where you are (about 150km from us in buffalo) than new york city and now new orleans. i think canadians follow responsible instructions better.

  4. I completely agree with you! Cash is king!

    I have 3 years’ worth of cash in my emergency fund. Sure, I might lose out on market gains and on inflation.

    But you know what? I sleep like a baby at night, no matter what the market is doing 🙂

  5. I like the diagrams you’ve made to explain the yield shield strategy. In your past explanations, it wasn’t as clear as it is now. However, your realized capital gains and income from dividends/interest both attract taxes, so is that part of your 40K annual spending? I’m curious.

    I quit my job in October 2019, and my expenses are tracking like yours. I’m not worried about what’s happening now, as I’m like you, I never go above that 40K annual spending.

    But boy, looking at that net worth drop by 30-40% is frightening if you don’t constantly remind yourself that the only way this can hurt you is if you sell. These are all unrealized losses, the only way they become real is if you sell.

    Stay safe.


  6. I retired in November with 5 plus years of cash. It is definitely helping us sleep better at night! Love the simplicity of your yield shield diagram above. It is exactly how we are thinking about managing our money in early retirement. Who knows where the stock market will be by the end of this year, but if it continues to be lower, we will just go and use 1 year of that excess cash to fund our 2021 spend.

    We’ve had to cancel one international trip this upcoming quarter already and will probably cancel a second one for later in the year, so it will help keep our costs down. And I haven’t driven my car in over 2 weeks, so less gas expense. The coronavirus is making it easier for us to reduce our spending. 🙂

  7. Hi guys, I have been reading a lot lately, awesome content by the way, including your book, and recommendation bloggers like JL Collins.

    It is weird though how it seems all of you forgot to give strategies on how to actually invest during a crisis. Everything is about how to invest in general times, and how to prepare ourselves to crisis, and how to behave during crisis once you have invested. But what about you have a massive amount of cash waiting for the crisis to come and you are ready to pull the trigger. SP 500 has dropped 20%, it is definitely the moment to go, even though it might drop more. Let’s imagine the worst case scenario if we want, why not. It drops until 90%, gradually like from 20 to 20 or so. What should we do? Buy a certain percentage of assets now (and if so, stocks? or bonds as well), and then define a certain amount to buy every certain period of time, in order to do something like a dollar average cost?

    Thanks in advance for the feedback.

    1. yes . i have been buying in dollar cost average way as it drops

      don’t think short term here . . long term investing is the way

      who cares if you don’t buy at rock bottom . its impossible anyway .

      1. Ya, can’t spend money anymore, nowhere to go, finally Mrs, Spaceman thinks we should save money, little does she know I was contributing to her Spousal RRSP, and all in a T-Bill account. I even think I was overbalanced, but now its saving my ass.

        The market has done some wierd stuff this time, I think its time to start writing about it, but in short, Markets are down by 30% aka crash, aka recession. The Market overreacted.
        And now… seems to be coming to its senses. Its a little too soon to tell, but even with all the bad news, getting badder. several things are in play to boost the market.

        1. The VIX is down from 82 to 65, 80 was the bottom indicator in 2009
        2. China announced it is back in business
        3. Massive QE packages passed in US and Canada
        4. Interest rates slashed to almost 0%
        5. And most important, why are people buying right now? Institutional Investors, Fund Managers, and Pension Funds, are required by law to keep a certain balance, based on their prospectus. They are forced to sell bonds, and buy equities to stay within the scope of the Fund or investment or they risk an audit. With the drop in Equities, they are way out of balance.

        The next week will be interesting, I have started my rebalance, but the bottom may still be several weeks away. I am ok with that.

      2. I agree with “ever after”, waiting to buy at rock bottom is impossible, people that does that often end up never buying. Instead of buying based on a calendar (every monday or every 1st of the month), I programmed to Buy a certain amount of shares at every 5 to 10% drop, starting at 25%. I’m a real estate investor, I thought of the stock market as a hardware store : if Home Depot offers 10% off on everything, will I buy some plywood for my next couple of years projects? No, I know that deal will come again. 15%? Same. 20%? Starting to think of it and maybe buy some stuff for my next months or so project. 25%? Yeah, I’m buying for the next scheduled projects, I know that deal only comes once or twice a year. 40%? I’ll fill up my garage with overstock of plywood and paint and tiles for the next 5 years! 50%? Where can I buy containers to have more storage, please? lol!

        1. Potential problem with this approach is that you’re anchoring the drops to a shifting (and often rising) price. For example, a 10% drop from late February highs simply took us back to November 2019 prices. Did you want to buy in November at the same price? Most likely, in November you would’ve thought those prices were too high, being an all time high at the time. Even now, we are simply back to January 2019 prices.

  8. Thanks for the post. I’ve always enjoyed your buckets example (and have even adopted something similar for when I pull the trigger). The only thing I am confused about is the part about refilling your cash cushion when the good times return.

    Assuming good times are back and you are pulling your 4% per year, wouldnt all that go to your current years spending? Or are you recommending pulling a greater percentage of 4% during the good times to help replenish the cash cushion??

  9. I recall you saying that the yield shield is only a 5 year thing due to the relatively high sequence of return risk in this period. I know I am not as smart as you guys in this sort of stuff, but I decided that we would use a yield shield for much longer. Either way it I good to see your advice working

  10. as the bull market was so long and a bear overdue .. i kept a lot of cash in HI savings

    this is the opportunity i was waiting for

    so got rid of all my bonds and PF’s now as i slowly bought as the crash started

    its hard to do but luckily i have now had a few years of knowing DIY investing .

    so now 100 % equities ..

    (later on i can move back to balanced if i wish )

    still have cash left over and lots of juicy dividends for more purchases over time . .. and for more drops

    and another bonus .. real estate will crash so i intend to purchase a year from now at incredible prices and mortgage rates ..

    feeling very lucky … so i am helping out with the less fortunate when i can ..

      1. see it as an opportunity

        its a dream come true for future wealth

        buy each week a set amount .. identify stocks or ETF’s you want

        and ease in each time … if you wait for the bottom . you will kick yourself later

        know that a huge rebound happens for a long time after the bottom comes ..

        does that help ??

    1. For George:

      Ummm people have been retiring effectively for decades amid numerous market crashes. The 4% rule is based on academic research, and although not perfect, has a high probability of success. FIRE people are by nature resourceful in the event more stringent measures are needed.

      People are FI all over the world following the principles outlined in Quit Like a Millionaire.

      Maybe a little less jealously on your part is in order. Just put in the work. If you want what they have stop hating and do as they have done.

        1. For Sam: There is a saying in Spanish. El mas feliz no es el que mas tenga, es el que menos necessita. (Conversational Spanish is my second language sorry for any grammar errors)

          I don’t need much, and I’m very happy. I’ve reduced my expenses to about $3,500 per month and hope to get it down further. I also work FT, have a side hustle, and rent a spare room (and financed a truck to my roommate). This downturn is an opportunity for me. I actually have limit orders in right now at low levels so I’m hoping for another significant drop before it goes back up.

          I know it makes envious trolls like you happy to pretend that this financial crisis will hurt people who are making financial decisions that will lead to freedom. Sorry to report that whatever the market does, I, and many, will be happy regardless. This is actually one of the most appealing, and crucial, points of FIRE. It isn’t all about the portfolio return.

          I will say you are right about one thing. “Academic Research” *air quotes and amused skeptical voice*. Who needs that bullshit? Science? C’mon man. Am I right? Plus, the stock market has gone up consistently for almost a century, but that stops right here, right now. You called it, man. And there are sooooo many other places for average, simple investors to put their money for 7% average returns.

  11. I’m curious. When calculating “your number” (the amount needed in your portfolio for retirement), is the three years in your cash cushion included in that that number? Or, is it “your number” + 3 years of a cash cushion? Basically, when saving to hit my number, should I think of it as “my number” + 3 years?

    1. No one answered so I will say what I think. I would say your number would not include the three years cash cushion. Why? Because you are aiming to live from investment returns and cash returns hardly anything apart from a good nights sleep…

      Having said that, I think you’d be close enough if you had the 3 years cash included in The Number (25x annual expenses). You look pretty young, so you’d probably have some income from a side-hustle, or short periods of working/freelancing anyway.

      Personally, I think more in terms of cash-flow than The Number. Having the ability to turn the “cash-flow tap” on when you need to is always important.

      Just my own thoughts, not meant to be definitive.

  12. hmm, all nice replies, really?

    looks like FIRE advice may have harmed lives

    lawsuits……i dont see any legal disclosures . Get ready kids

    1. Harm lives… how? The FIRE message is essentially “live below your means, save and invest”. How is that bad advise? Downturns do happen, you just need to plan for them. If your time horizon is long enough, any crisis will just be a temporary blip and your investments will recover.

      PS: Balance is your friend

  13. Dang, how did you know I’ve thought about using extra cash for a Tesla? LOL I won’t do it, but I dream sometimes…

    1. Keep it in your dreams… 😉

      I finally got rid of the car about 18 months back and it was like having a tumour removed…

  14. Cash is definitely kind in time of crisis. Mrs. NN has pushed me to be more conservative with our allocation since we retired (back in 2018) and thanks to her we are now enjoying at least 5 years of cash which hopefully should be plenty for us to ride this crisis but also repurchases stock on sale.

    Have you guys started to repurchase low-cost ETF? If so, what frequency are you using and over which period of time are you looking to repurchase? Are you sticking to the 24 occurrences over a 12 months period that you mentioned in your post from 3/9/2020?

    As for us here in Taipei, we are also looking at AirBnB and we’ve also noticed a much cheaper rate. Not sure how long this will go, but we already got a 50% discount for our AirBnB in Taipei for April (on top of the regular monthly discount), which make the city much more affordable and a place we would feel comfortable staying until our visa expires (assuming the situation will keep ongoing for months). 4 more days of self quarantining before we can get outside of stretch our legs and refresh our lungs with fresh air! Can’t wait!

    Stay well & healthy and keep on the good content.

  15. think most ppl confusing you to have 3 years of cash as in 120k on the side.

    what I understand you to really mean from previous posts is something much less, around 15k right? simply the amount you need to top up each year of 5k from your EXPECTED yield shield payout (of 35k or so)

    but then there’s the scenario the yield is often expected not to be maintained after the crisis. potentially you’d have to dip into all of the cash cushion for one year’s 40k

    unfortunately there’s too many holes in how you talk about yield, once again, and people quitting their job using the approach don’t have clear take on the risks

    no doubt you’re resourceful and will get by. but many others are expecting bit more safety from the plan than what they’re lead to believe

  16. now that yield is front and centre.. can we please start acknowledging at least the chance (if not high likelihood) for decreases in expected yield and that receiving dividends in a crash is mechanically the same as selling shares in a crash

    1. I agree with you. I have never really seen the utility of the Yield Shield other than a thought experiment.

      You are right one when you mention that they likely aren’t setting $120k aside in a cash cushion–and that amount is more like the delta between their expected yearly spending and income from the dividends (~$5k/year if I recall correctly).

      I’ve always found the way they portray that to be confusing and needlessly complex.

  17. Dividends are certainly at risk in individual stocks. Less risk in the ETFs but still some lower adjustments are possible.

    That said, would you be so kind as to showing us your current ETF line up from your changes earlier in the year? Maybe we could all start to compare….


    ZAG 30
    ZPR 10

    XAW 40
    ZLB 10
    XRE 10

    Many thanks as always. Stay safe.

  18. I’ve had huge discussions with Big ERN about how smart a Yield Shield is in the beginning of FIRE and he always disagree and come with math and statistics to show it’s not smart.
    What do you guys say about that? For me is a very good and reliable plan. You don’t have to sell a single share now to finance your FIRE life so, what’s better than this?

    1. it’s a psychological trick. it’s bad because it makes people feel more secure in a crash than they really are.

      dividends are just forced sales. you’re still selling. plus now you’re filling up your supposedly stable fixed income allocation with all these risky assets like REITS and dividend stocks which are just as volatile as equities

      if you THINK a you’re 70/30 but your fixed income is made up with those yield assets, you’re actually closer to 85/15 without knowing it. that’s really dangerous

  19. Guys, you’ll thank me later but please try and understand the fallacy on dividends/yield shield

    “Strategies have been proposed to eliminate sequence of returns risk with high-dividend stocks. This wouldn’t have occurred to me because sequence risk is caused by systematically selling stocks when prices are low. Cash dividends don’t avoid sales at low prices; they are effectively a forced sale that will occur regardless of the stock’s price and with timing decided by the company.”

    1. Basketcase, I think understanding this dividend fallacy is really important. I always challenge myself rigorously to avoid cognative biases. I like to think I make some progress on that. Definitely need to understand the psychology and finance of this to properly make personal finance decisions.

      Thank you!

      How have you used your understanding of this phenomenon in your own investing career? Decisions on what to do and what not to do?

  20. My dear, how is your portfólio?
    I imagine that the ass*hole Wander is now laughing…..
    I said some months ago that this crisis was coming but since he knows it all….. he took all the measures, not!
    It’s well-deserved, you bastard. Now you will still bleed a bit more.

    One day she will leave you, never forget that boy…… a bastard like you will never win at the end.

  21. Hello!
    I apologize if I missed this in your book or an earlier post, but do you have any suggestions on where to keep your cash cushion and current year money? Is it in a high interest savings account, or bonds?
    Thank you!

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