What if the money sitting in your savings account—the cash you think isn’t “working hard enough”—is actually your most powerful wealth-building tool?
When Everything Changed for the Johnsons
Meet David and Sarah Johnson. Successful professionals. Smart investors. They’d been told by their previous advisor to “put every dollar to work” and minimize cash holdings. When the 2008 market crash hit, they watched their retirement accounts plummet just as David lost his job.
With no meaningful cash reserves, they faced an impossible choice: liquidate investments at their lowest point to pay bills, or rack up debt on a line of credit their advisor had recommended as a “cash alternative.”
They chose the line of credit. Big mistake.
By the time David found work eighteen months later, they’d accumulated $75,000 in debt at variable interest rates. Worse, they’d missed the entire market recovery because every spare dollar went to paying down that debt instead of buying investments at rock-bottom prices.
The Johnsons learned a hard lesson:
It’s not what you make on cash that matters, but what cash allows you to make on everything else.
The Gatewood Cash Philosophy: Savings vs. Investments
At Gatewood Wealth Solutions, we make a crucial distinction that most advisors ignore. Savings are inherently less risky, and the funds are liquid. Investments are 100% at risk 100% of the time. This isn’t just semantics. It’s the foundation of building enduring wealth with purpose.
Many advisors will tell you to “put your cash to work” in something “safe.”
Here’s the truth: there is no such thing as a safe investment. All investments carry the risk of loss. When someone says they want their cash to “make money,” they’re confusing the purpose of cash with the purpose of investments.
Cash serves two critical functions in wealth building:
- To avoid liquidating investments at the wrong time
- To seize opportunities
Notice both purposes matter most when investment values decline. That’s not coincidence—it’s strategy.
What This Means: The Mathematics of Opportunity
Let’s examine what happened to Jane, a hypothetical 65-year-old retiree with a $2 million IRA, planning to withdraw $140,000 annually (7% of her initial balance). ¹
Scenario 1: No Cash Strategy
Jane withdraws systematically from her S&P 500 investments regardless of market performance during the period 1973-1988.
Result at age 80: $1,442,897.
Scenario 2: Strategic Cash Reserve
Jane uses cash reserves during the four down market years, preserving her investments when values are depressed.
Result at age 80: $3,763,052.
The difference? A staggering $2.3 million.
Here’s what makes this remarkable: the investment performance was identical in both scenarios. The only difference was having $478,146 in cash to tap during down years.
Even if Jane earned absolutely nothing on that cash, her outcome was dramatically better.
Why This Matters: The Line of Credit Trap
Most advisors today recommend lines of credit as “cash alternatives.” They’ll say, “Why keep cash earning nothing when you can access credit when needed?”
This approach adds both cost and risk to your financial plan.
The Hidden Costs:
- Interest payments on borrowed funds
- Variable rates that can spike unexpectedly
- Loan payments that prevent you from buying investments when they’re cheapest
- Credit limits that can be reduced exactly when you need them most
The Real Risk: Lines of credit turn temporary market downturns into permanent wealth destruction. Instead of having cash to weather storms and capture opportunities, you’re paying interest and missing recoveries.
At Gatewood, we believe wealth is personal. Your cash needs are unique to your situation, your goals, and your confidence.
The Gatewood Cash Formula
Our process-driven approach calculates your optimal cash position based on your life stage:
Accumulation Phase:
3-6 months of expenses for emergencies. This protects your systematic investing strategy (dollar-cost averaging) from being derailed by life’s unexpected moments.
Approaching Retirement:
Gradual accumulation toward your 24-month target, ensuring you enter retirement with adequate liquidity.
Distribution Phase:
24 months of your income shortfall after guaranteed sources like Social Security and pensions. This creates a buffer that allows your investments to recover from market downturns.
An Analogy That Clicks
Think of cash like the foundation of a house.
You don’t build a foundation to be beautiful or to generate income. You build it to support everything else. The stronger your foundation, the taller and more ambitious your structure can be.
Cash works the same way in your financial plan. It’s not there to generate returns—it’s there to support higher returns in your investment portfolio by giving you the confidence to take appropriate risks and the flexibility to act when opportunities arise.
Would you rather have a beautiful foundation that crumbles under pressure, or a solid foundation that allows you to build wealth that endures?
When Lines of Credit Do Make Sense
To be clear, we’re not opposed to all forms of credit. Securities-backed lines of credit can serve a strategic purpose in specific, short-term situations where cash flow timing creates temporary gaps.
For example, if you’re buying a new home before your current one sells, a securities-backed line provides bridge financing without forcing you to liquidate investments or miss out on your dream property.
Similarly, if you’re expecting a substantial bonus, stock options vest, or you’re closing on the sale of a business within a few months, using credit to bridge that gap can make perfect sense. The key distinction is timing and certainty.
These are situations where you have reasonable confidence that cash will follow in a relatively short period—typically 3-6 months. What we caution against is using lines of credit as a permanent cash substitute or relying on them for unpredictable expenses where the repayment timeline is uncertain.
The difference between strategic short-term leverage and dangerous cash replacement is the difference between a useful tool and a wealth destroyer.
Other circumstances where securities-backed lines of credit might make sense include:
- Tax payment timing (when you know a refund is coming)
- Seasonal business cash flow needs with predictable revenue cycles
- Taking advantage of a time-sensitive investment opportunity when a planned asset sale is imminent
- Emergency situations where immediate access is needed and cash reserves are being replenished through planned distributions
The Gatewood Difference
While other advisors chase yield on every dollar, we focus on purpose. We keep your priorities the priority.
Our relationship-driven approach means we understand your unique situation, your concerns about market volatility, and your need for confidence in uncertain times. The true value of planning is the confidence it creates.
We’re not product-driven—we’re process-driven. We don’t sell you investments. We guide you through building enduring wealth with purpose so you can have confidence for life’s key moments.
With expertise and care, our team monitors your cash position throughout different market cycles, adjusting as opportunities arise or as your circumstances change.
What Happens Next
During strong markets, we deploy cash strategically at lower valuations. As markets reach new highs, we begin raising cash by taking profits in specific asset classes. During weak markets, we may redeploy cash at lower valuations or spend down reserves to give investments time to recover.
This isn’t market timing—it’s strategic cash management that puts you in control of your financial destiny.
Your Next Step
If you’re tired of advisors treating every dollar the same, if you want a wealth strategy built around your unique situation and goals, if you’re ready to discover how proper cash management can supercharge your investment returns, we should talk.
Don’t let another market cycle catch you unprepared. Don’t rely on debt to fund opportunities or weather storms.
Ready to discover what your cash can really do for your wealth?
Schedule a conversation with our team to learn how Gatewood’s cash philosophy can transform your financial confidence. Because at Gatewood Wealth Solutions, we understand that wealth with purpose starts with understanding what each dollar should accomplish.
Remember: It’s not what you make on cash that matters, but what cash allows you to make on everything else.
References
(1) Hypothetical example for illustrative purposes only. Beginning value $2,000,000 in IRA; S&P 500 historical return during 1973-1987, including dividends; $140,000 withdrawal each year: $0 withdrawal in years after a negative return except for required minimum distribution. These numbers do not reflect fees and charges associated with an actual investment. Historical S&P 500 returns from Bloomberg. The S & P 500 Index is a list of securities frequently used as a measure of U.S. Stock Market performance. Required minimum distributions from the IRA under Federal Tax Law. Source of diagrams from Northwestern Mutual’s brochure, “Down Markets Matter”, 67-0788 (0715).
(2) Investopedia – A required minimum distribution (RMD) is the amount that traditional, SEP or SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70.5. RMD amounts must then be distributed each subsequent year based on the current RMD distribution calculation amounts. http://www.investopedia.com/terms/r/requiredminimumdistribution.asp#ixzz4nzGcn0T4
(3) The primary purpose of permanent life insurance is to provide a death benefit. Using cash values to supplement your retirement income will reduce the benefit and may affect other aspects of your life insurance plan. Accessing the cash values through policy loans, surrenders of dividend values, or cash withdrawals will or could; reduce death benefit; necessitate greater outlay than anticipated; or result in an unexpected taxable event. Assumes a non-Modified Endowment Contract (MEC).
(4) Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high. Dollar Cost Averaging (DCA) – Investopedia www.investopedia.com/terms/d/dollarcostaveraging.asp
(5) Higher returns are not guaranteed through this strategy. However, it is a sound strategy to help manage downside risk and can achieve improved outcomes as explained in the retirement distribution example in this report.
Important Disclosures:
¹This is a hypothetical example and is not representative of any specific investment. Your results may vary. (88-LPL)
Securities and advisory services are offered through LPL Financial, a registered investment advisor and broker-dealer, Member FINRA/SIPC.
Insurance products are offered through LPL or its licensed affiliates. Gatewood Wealth Solutions is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Gatewood Wealth Solutions and may also be employees of Gatewood Wealth Solutions. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Gatewood Wealth Solutions.
Securities and insurance offered through LPL or its affiliates are:
- Not Insured by FDIC or Any Other Government Agency
- Not Bank Guaranteed
- Not Bank Deposits or Obligations
- May Lose Value
