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Wealth is all about risk.

Do you need to risk it for the biscuit?

When you’re young and have no money, taking a ton of risk makes sense. You don’t have much to lose but infinite to gain. Why not put it all on black when Mom and Dad will have your back?

As you work hard to build your wealth, it’s essential to make sure no single event can put you on the street. Growth doesn’t matter if you can’t keep it, even if you need to gather all the king’s horses and all the king’s men.

Building Fortress Finances is about how much cash you can access immediately in any market condition. 

How tall and thick do you need to build the walls? How deep the moat? No need to worry about that right away, you simply have to start by managing how much you keep in your checking and savings accounts. As you become more advanced, you can borrow against your investments without selling them and no tax for the king!

Account Ability

A strong foundation starts with the most fundamental yet often overlooked accounts: checking and savings. The ketchup and mustard of a burger budget.

Your checking account runs the show; it’s your front line of defense against unexpected costs, your ride or die. It’s also the account that’s got your back when you go purchase that 100-inch TV that definitely isn’t overcompensation for something.

Quick note: Since you may have multiple checking and savings accounts, we’re naming them here so we can be specific. You will want a dedicated account for each of these purposes.

Working Capital - Your checking account

Money will flow in and out of this account and is the first financial line of defense. Just make sure you keep enough crocodiles in it to stop castle crashers.

Every month, it costs you a certain amount to live. That means a roof over your head, food on the table, and everything from shampoo to dinners out (or delivered in) and those packages you hid in your closet.

Your working capital balance should be 2x your average monthly expenses.

If you spend an average of $5,000/month, you should keep $10,000 in your Working Capital account.

The goal is to always have enough in your checking account to handle all unplanned expenses. At this level, you won’t worry about whether you can make your credit card payment or replace that tire you slammed into a pothole. Mom needs a birthday gift? No big deal. Mother-in-law needs a birthday gift? Maybe next year.

Being wealthy is about not worrying about money. When you gather 2x of your monthly expenses in your checking account, you are officially level 1 wealthy. Congrats, you’ve gotten a stat increase and learned a new attack!

The Reserve - Your savings account

The purpose of your Reserve, or emergency fund, is to bail you out when you have no safety net. They are your knights in shining armor.

Emergencies happen maybe 1-2 times a year. If you’re me, emergencies sometimes happen weekly after too much coffee.

If you are having emergencies more frequently, they are not emergencies. Perhaps it simply feels like an emergency because you don’t have a proper level of working capital (or you have incredibly bad anxiety).

You should rarely, if ever, touch money in your reserve account. Don’t even think about it.

This money should be like the couch in your grandmother’s house: covered in plastic so you never actually touch it. This is not where you save for a new computer or a vacation. That comes from your working capital account. Spent more than you earned this month? That comes from your working capital account. Autopilot fail you in your Tesla? That comes from your reserve.

You should keep 3x of your average monthly expenses here.

So, if you spend $5,000/month, your Reserve account should be $15,000. Nail that, and you’re level 2 wealthy. You gained an extra item slot!

Fortress Finances - Brick by Brick

For every $5k/month you spend, you need at least $25k between your working capital and reserve accounts.

Let’s see how these numbers stack up against real-world examples of unplanned expenses, emergencies, and splurges like vacations.

• Given zero income, you could last for 5 months before you run out of cash.

• The average repair cost for a car insurance claim was $4,721 in the second quarter of 2024, reflecting a significant increase over the past few years.

• A study found that the average annual home maintenance cost in New Jersey is approximately $18,151, compared to the national average of around $16,000.

• The highest out-of-pocket maximum for health insurance plans was $9,100 for individual plans and $18,200 for family plans.

If you can prevent one unforeseen event from wiping you out, you’ve removed your most significant financial risk and increase your chances to sit on your golden throne.

E-moat-icon

After you meet your Working Capital and Reserve balance requirements, you should be able to weather 95% of all storms. After a few months like this, your blood pressure should drop significantly, and you’ll worry less about money. You’ll also be able to taste and smell better and your hair on your head will miraculously return. Nature is healing.

You can’t make the right decisions when you’re worried about money, and our goal is to make the best long-term decisions. If you are so focused on getting through the next month or year, how can you plan for decades in advance?

In 5% of situations, you will need more than your reserve, and they might not be emergencies. That is OK.

Significant expenses that come to mind:

• Buying a Home

• Home Renovations

• Weddings

• Starting your own business

• IVF

• LEGO

• The list goes on…

Dealing with the 5%

To have true Fortress Finances, we need to be able to draw on a deep pool of cash and have great flexibility.

Do you know how most millionaires and billionaires do it? They borrow against their investments. Elon Musk can borrow against his Tesla (TSLA) shares like you can against your Apple (AAPL) shares. Your rates will also be pretty similar.

Why borrow against investments? Because it’s super cheap, even cheaper than mortgage rates. Plus, there are also no tax implications, whereas if you had gains, you’d be taxed on those gains when you sell. It’s more tax-efficient to borrow since the rates are low, and you can deduct interest from your taxes.

In June of 2018, you could have borrowed from your investments in M1 for 3.5%. Mortgage rates at that time were ~4%.

Today, I can borrow against my investments in M1 for as low as 5.25%. Mortgage rates at the time of writing are ~6.7%.

The point is that borrowing against your investments is very cheap.

How do you borrow from your investments?

This should be a built-in feature with your investment platform of choice. It’s often called margin (both our favorites M1 and Robinhood support it).

Margin allows you to borrow against your investments, meaning they are collateral for your loan. Since these investments are more liquid than your house, borrowing against them is cheaper.

Usually, you can borrow up to 50% of your investments, shielding you from all but the most cataclysmic situations that would force you to sell shares.

Since there is no upward limit on your shares' value, you could potentially mobilize millions at almost a moment's notice like the king and warmonger you are. If that isn’t true power and flexibility, then what is?

I have personally used margin loans to:

• Put a down payment on an apartment.

• Put a down payment on a home.

• Put a down payment on rental properties.

• Fund renovations in my home.

• Invest in growing my business, Lasso, before it had revenue.

Once I have a margin loan, I focus on paying it down. But, since the rate is so low, the carry cost is nothing compared to the opportunity cost of me not having that money invested at all times.

You are now level 3 wealthy. You have unlocked a secret ending!

I’ll go into this in more detail in a future Newsletter.

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— Jamie Dimon

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🏦 Mercury - The best small business checking account, full stop. We use it for all of our businesses, including my personal checking.

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May the cash flow always be in your favor,

Andrew and Lou - the Funny Money team