I came across a post by Jim Wang at Wallet Hacks recently, where he describes the importance of building a financial fortress.
In his post, Jim describes how we are constantly under financial attack by financial emergencies that are authentically and genuinely unexpected. There’s minor emergencies, like a nail in the tire, and major emergencies, like a trip to the emergency room. All of these are attacks on your money. Building your financial fortress is crucial to defending yourself from these attacks.
I really loved Jim’s way of illustrating this concept through a castle analogy 🏰 so that it’s easier to visualize, and I wanted to share my understanding of it.
FINANCIAL FORTRESS
Your financial fortress is the method of how you manage and organize your money and assets to effectively defend 🛡️ yourself from financial emergencies.
The more layers you add to your financial fortress, the more options you can utilize to counter different types of emergencies.
Don’t be discouraged if you do not have all parts of your financial fortress built yet. Most people don’t.
This is not something that you can just set up overnight. It takes years to build all the components - focus on building them one at a time. Also, it is a continual work in progress to maintain and fortify as time goes on (i.e. increasing savings from having kids, buying more insurance for owning larger assets, etc.).
ATTACKERS - EXPENSES
Attackers are any expenses that you have to pay for.
These include day-to-day costs (i.e. bills, groceries and rent), which you can generally expect or plan for.
Then there’s the sneaky Attackers - the unexpected costs. These can be small expenses, like replacing a light bulb 💡 or buying over-the-counter medicine 💊 for a migraine.
And lastly there’s those BIG sneaky Attackers - the major unexpected costs - like when your car suddenly breaks down, or the water pipe breaks and your house starts to flood, or your cat gets too chonky from overindulging on kibble and overestimates himself by jumping off a tall cabinet and breaks his leg.
You want to be prepared to defend your financial fortress from all types of Attackers 🗡️ (expenses).
MOAT - YOUR CHECKING ACCOUNT
A moat is a body of water that surrounds a castle used for protection.
Your moat is your checking account. This is your first line of defense. Your checking account will be used to pay for the bulk of your expenses, like your groceries 🥑, rent/housing and bills. You may use a credit card to pay for these costs first, but you will pay off your credit cards with your checking account (hopefully in-full each month).
Your moat must be the most 💧 liquid 💧 of your money sources. This means, it should be readily accessible.
It is also the first to be replenished, with your paycheck and / or other sources of income.
OUTER WALL - YOUR EMERGENCY FUND
Your outer wall is used to protect yourself from large unexpected incidents (expenses). These can include extensive car repair costs, a trip to the emergency room 🏥, a job loss, etc. Might as well add a global pandemic to the list.
Your emergency fund is crucial, as it would be used to pay for expenses that would exceed your checking account’s capacity, and pay for your living expenses if you temporarily lose your income (i.e. due to a job loss). Building an emergency fund is one of the most important things you have to prioritize for your financial security, as you really want to avoid relying on credit cards or tapping into your retirement accounts if you possibly can.
Ideally, you should have a minimum of 3 months worth of living expenses in emergency funds. Some people prefer even up to 6 to 12 months of emergency funds. It’s up to your risk appetite and the stability of your income.
Your emergency fund should be liquid, but it does not have to be as liquid as your checking account. Personally, I leave mine in a high yield savings account and no-penalty CDs (a type of CD that has no penalty if you withdraw your money before the agreed time). They offer higher interest rates than my checking account does, but I can access the money within a few days of notice.
ARCHERS - YOUR INSURANCE
Your Archers are perched on top of your outer wall. These are your insurance policies. Your insurance will help to protect and lessen the blow of the Attackers’ damage to specific covered areas.
I have medical and dental insurance primarily covered by my employer. Additionally, I purchased auto insurance to protect my car 🚗, renter’s insurance required for leasing an apartment, pet insurance to cover medical costs for my 2 purrtatos 🐱🐱 and umbrella insurance ☂️ as a catch-all.
Insurance provides peace of mind. Should I suffer a covered event, my insurance protects me from too much damage to my outer wall, or emergency funds.
INNER WALL - YOUR INVESTMENT & RETIREMENT ASSETS
If the situation is serious enough, we now reach the inner wall. The inner wall is comprised of your investment assets (i.e. taxable investment account, like stocks and bonds you’ve bought) and your retirement assets (i.e. 401k).
You’ll want to sell your long term taxable investment accounts first (those held for more than 1 year), followed by your short term taxable investment accounts (those held for less than 1 year). The reason is that you’ll pay less taxes on gains from long term investments.
Last resort here are your retirement accounts, as those come with penalty fees for withdrawing early before retirement. There are exceptions to these penalty fees depending on what the withdrawal will be used to cover (i.e. medical expenses), so be sure to plan accordingly.
KNIGHTS - YOUR CREDIT CARDS
Throughout your financial fortress, you have your knights, or your credit cards 💳.
Your credit cards can help you pay for your everyday expenses and deal with smaller issues. If used responsibly, they offer great rewards (i.e. cash back, travel points, etc.) And more importantly, they give you a bit of time gap between paying for something and having the money deducted from your checking account.
However, the time gap should not be more than 30 days, as you should try to pay off your credit card balance in-full each month. You should not rely on credit cards to solve your financial issues because carrying a balance will come at an expensive price. The interest rates on credit cards are extremely high - they will entirely outweigh any rewards you get from the credit card, as well as any interest you earn from your savings accounts or CDs.
HIGH TOWER - YOUR HARD ASSETS
Lastly, we get to your high tower. These are your hard assets or your possessions, like your clothes, jewelry, furniture, car and your house.
This isn’t necessarily your last line of defense, because you will want to sell off certain possessions - like old clothes 👕 or unused furniture 🛋️ - before maxing out your credit card, selling your investments or dipping into your retirement assets.
But when it comes to your house and car, you’ll want to protect those as much as you possibly can and avoid getting them taken from your possession. The more strongly fortified 🛡️ your financial fortress, the less likely you will expose your high tower.
