A home renovation. College tuition. A second home. A business opportunity. What do they all have in common?
They can require a significant amount of cash. For many families, the first instinct is simple: sell investments or pull money from savings. That may be the right answer. But before doing that, it may be worth asking: Is there a more efficient way to fund it?
Selling Assets Has a Cost
When you sell investments, you may give up future growth, trigger capital gains taxes, and permanently reduce assets that were intended to build long-term wealth. Consider someone who needs $500,000 for a major purchase.
One option is to sell $500,000 of investments and pay cash. Simple. But now that money is no longer invested.
What About Using Leverage?
Another option may be to use available borrowing capacity while allowing long-term assets to remain invested.
Depending on your situation, that could include:
- Asset-based lines of credit on non-retirement investments
- Cash value life insurance loans or lines of credit
- Home equity lines of credit
- Business lines of credit
- Traditional bank financing
The goal is not to borrow simply because you can. The goal is to compare the cost of borrowing with the cost of liquidating assets.
Old Savings vs. New Cash Flow
This is where the planning gets interesting. You can fund a purchase with old savings, meaning assets you have already accumulated. Or you may be able to use new cash flow, meaning future income that services the borrowing while your existing assets remain invested. For example, imagine a client who is already saving $150,000 per year.
Instead of stopping the investment plan or liquidating a portfolio, future savings could be split: $50,000 per year toward servicing the line of credit. $100,000 per year continuing into the normal investment strategy.
The client is still investing. The existing portfolio remains intact. And future cash flow helps fund the purchase over time. That changes the question from: “What should I sell?” to: “How should I allocate future cash flow between this purchase and continuing to build wealth?”
Liquidity Creates Choices
Sometimes paying cash will clearly make the most sense. Sometimes responsibly using leverage may create a better long-term outcome.
The important part is comparing:
- The tax cost of selling
- The growth you may be giving up
- The cost of borrowing
- The impact on cash flow
- The risks of the loan
- Your remaining liquidity
Final Thought
Before making a major purchase, do not automatically ask: “Where can I get the cash?” Ask: “What is the most efficient way to fund this?”
Sometimes the answer is savings. Sometimes it is leverage. Sometimes it is a combination of both.
The goal is to fund the purchase without unnecessarily disrupting the wealth you have already worked to build.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. WEALTHWISE PRIVATE CLIENT is not an affiliate or subsidiary of PAS or Guardian. CA Insurance License Number – 0G21238. 9116658.1 Exp 09/28.
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