Personal Finance Knowledge Hub
The most frequently asked questions in personal finance —
build wealth more efficiently with less risk.
Goals: Traditional (risk-based) vs. outcome-based planning
When can I retire?
FAQ: When can I retire?
Answer (definition):
That depends on your framework. Traditional planning treats retirement as a date on a calendar. Outcome-based planning treats it as a level of confidence that can be measured, managed, and reached. The distinction changes everything.
Every individual faces a fundamental choice: they can prioritize their preferences or their goals — but not both, because the planning path is fundamentally different. Traditional financial planning is risk-based: it starts with how much volatility you can tolerate. Outcome-based planning is goal-based: it starts with what you want to achieve, and then calculates the least risky way to get there.
Balance Sheet Architecture™ works with either approach, but our Knowledge Hub focuses on the outcome-based path — because it’s the only framework that can tell you exactly when you can retire, and with what degree of confidence. You choose the confidence level — for example, 99.99% — and the model computes the amount of wealth required to meet it. Once that target is set, every saving, investing, and debt decision can be optimized to reach it in the shortest, safest possible way.
Through this lens, retirement is no longer a fixed age but a funded probability. For any given level of net worth, your balance sheet can show what level of income can be supported, and with what degree of certainty. The traditional question — “When can I retire?” — becomes more precise: “At what confidence level am I already retired?”
Overview (expanded):
Traditional financial planning usually begins with a list of goals — retirement, college savings, buying a home — followed by a risk questionnaire that classifies the investor as conservative, moderate, or aggressive. Advisors then place the client into an asset allocation model, which remains fixed or changes only gradually. Debt is usually treated outside the framework. This approach is familiar, widely used, and supported by most planning software.
In a traditional plan, you select a date and a risk tolerance. That combination determines a static portfolio, and a probability of success is calculated — typically something like “an 80% chance you won’t run out of money.” The portfolio remains mostly fixed, and the investor adjusts savings or spending if projections drift.
The traditional approach is risk maximizing with respect to investing. Your preferences — how much risk you are willing to take, whether you want to carry or avoid debt, whether you prefer to hold extra cash — set your path. Asset allocation is then built around those preferences, largely independent of the actual goal. In this framework, risk tolerance and preferences drive everything, and the model adapts slowly over time.
By contrast, outcome-based planning works more like autopilot. It continuously recalculates the most efficient way to reach your destination, using all available resources on the balance sheet, with the least amount of risk. Here, you don’t select a date — you select a desired level of confidence. For example, you might choose 99.99% confidence that you’ll never run out of money, even through a Great Depression–level event. Every decision — about saving, investing, or debt — is then optimized to maintain that confidence level.
Under outcome-based planning, for any quantity of money, you know what you can do and with what degree of confidence. This is what most people actually want: Show me the 99% confident path. Once that path is known, it can be compared directly to your preferences. You can choose to take more risk or less, but you are doing so knowingly — anchored to a clear, quantifiable standard.
Outcome-based planning is therefore risk minimizing. Both frameworks use the same assumptions about return and volatility, but outcome-based planning uses those assumptions to calculate the least risky way to achieve the goal. All decisions — investing, cash, and debt — center around that goal. Like a gyroscope, the goal is the center and everything else moves around it.
Fundamentally, the two frameworks respond to risk in opposite ways. Risk-based investing assumes that when markets fall, investors will be tempted to sell, so it encourages avoiding risk to prevent that behavior. Rebalancing is typically done quarterly, back to a fixed target. Outcome-based investing, by contrast, embraces risk as part of the process. It assumes negative events will occur and seeks to capitalize on them, adjusting allocation proportionately to the event — turning volatility into opportunity.
Under traditional planning, “When can I retire?” is answered by a projection. Under outcome-based planning, it’s answered by a confidence threshold: as soon as your portfolio and reserves can sustain your lifestyle at your chosen confidence level, you are financially independent. Retirement is not an age — it’s a level of funded confidence.
Key Takeaways:
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Traditional planning = risk-based; outcome-based planning = goal-based.
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Traditional planning fixes a date and risk tolerance; outcome-based planning fixes a confidence level.
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Traditional models estimate a probability of success from a static portfolio.
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Outcome-based models optimize every decision to maintain a target level of confidence.
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For any level of wealth, you can know what you can do — and with what degree of confidence.
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Path efficiency means taking the least risk necessary to reach the goal in the shortest time, making near-certainty (99.99%) possible.
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Retirement is not a date; it’s the point where assets and reserves can sustain your lifestyle at your chosen confidence level.
Applications:
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Individuals: Define retirement by confidence, not by age. Choose the level of certainty you want and plan backward from it.
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Advisors: Model multiple confidence levels to show clients how time-to-goal changes with behavior and leverage.
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Enterprises: Build planning platforms that optimize dynamically to confidence thresholds rather than static timelines.
Video (coming soon):
Traditional vs. Outcome-based planning
Learn More / See Also:
Outcome-Based Planning | Your Wealth Levers™ | Path Efficiency | Endowment versus Insurance Framework: Managing to a Known Liability | Risk: Different perspectives
Academic References:
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Merton (1969, 1971) — dynamic intertemporal portfolio optimization.
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Tobin (1958) — separation of risky and risk-free portfolios.
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Sharpe & Tint (1990) — liability-driven investing.
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Bodie & Merton (1992) — lifecycle finance integrating human capital and consumption smoothing.
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Thomas J. Anderson (2024) — Spiral Theory and Outcome-based planning
Opportunity: The role of a Global Equity Target (G.E.T.)
How should I invest my money?
FAQ: How should I invest my money?
Answer (definition):
Investors face two fundamentally different choices in investing: they can invest according to their preferences or according to their goals. In theory, the two could be blended, but in practice this is often suboptimal because it means not fully following either path.
Overview (expanded):
Traditionally, investors place heavy weight on their preferences. These may include risk tolerance, market views, or asset-class biases — favoring bonds, real estate, commodities, or crypto. Portfolio theory, at its core, says preferences are irrational if better alternatives exist. All else equal, one should prefer higher return over lower return and lower risk over higher risk.
In theory, the “ideal” portfolio — the tangency portfolio — delivers the best mix of risk and return. In practice, this portfolio can be approximated with a basket of global equities: the roughly 9,000 largest companies worldwide, without home bias.
Most professionals agree that global equities should be part of every portfolio, but the key questions are how much, and when. An outcome-based approach builds the global equity base first — locking in the highest expected return — and diversifies later. The cost of diversifying too early is premature diversification, a drag on compounding.
Once you achieve your global equity target, however, theory shifts. It becomes irrational to keep building the base. Instead, the efficient path is to de-risk by moving down the capital allocation line. In practice, this means continuously shifting excess growth into safer assets as wealth increases. Importantly, this provides a shock absorber: when global equities contract (as they inevitably will), the safer assets can be reallocated back into equities. But here, rebalancing is not to a fixed percentage of a static model — it is to a target quantity tied to the goal.
This leads to a fundamentally different response to risk:
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In accumulation: You “fill the cup” with global equities until the base is met. Spillover then goes into lower-risk assets. When markets fall, you rebalance back to the target quantity (not a fixed %).
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In retirement: The same logic applies, but the flow reverses — wealth is gradually drawn down relative to the goal, with the safe assets serving as ballast.
The safe asset here is best thought of as the currency you measure your life in — dollars for a U.S. investor, euros for a European. It should carry no duration (interest rate) or credit risk, meaning cash or short-term government bonds are the best proxies.
This path — building the equity base first, then continuously de-risking along the capital allocation line — can be directly compared to other approaches after fees. It serves as a dynamic, more efficient benchmark that adjusts as wealth changes. Later, when wealth significantly exceeds goals, preferences can — and arguably should — come back in, since surplus wealth can accommodate them without compromising efficiency.
Key Takeaways:
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Global equities approximate the “tangency portfolio” — the most efficient return/risk mix.
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Build the global equity base first; diversifying too early imposes premature diversification costs.
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Once the base is reached, efficiency requires continuous de-risking along the capital allocation line.
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Rebalancing is to a target quantity (linked to the goal), not a static percentage.
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The safe asset should be risk-free in currency terms: cash or short-term government bonds.
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This creates a dynamic benchmark for wealth that adapts over time, and later allows preferences back in once goals are exceeded.
Applications:
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Individuals: Build the global equity base, then use safer assets as shock absorbers while rebalancing around goals.
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Advisors: Show clients how quantity-based rebalancing differs from percentage models. Quantify the risk and cost in years working of premature diversification.
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Enterprises: Redesign planning benchmarks around capital allocation line logic, not static models.
Video (coming soon):
“Global Equity Target vs. Static Models”
Learn more / See Also:
Global Equity Target | Premature Diversification | Outcome-Based Planning | Path Efficiency
Academic References:
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Harry Markowitz (Modern Portfolio Theory)
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William Sharpe (Capital Market Line, CAPM)
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James Tobin (Separation Theorem, risk-free asset integration)
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Eugene Fama (Efficient Market Hypothesis, global diversification)
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Robert Merton (Dynamic portfolio choice, lifecycle finance)
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Thomas J. Anderson (Spiral Theory, outcome-based planning)
The Value of Debt
Is all debt bad / what kinds of debt are okay?
FAQ: Is all debt bad / what kinds of debt are okay?
Answer (Definition):
High-cost debt is always bad. Low-cost debt can be highly beneficial to financial outcomes.
The Value of Debt book series by Thomas J. Anderson shows that debt comes in different forms — some destructive, some constructive. There are three books in the series: The Value of Debt, The Value of Debt in Retirement, and The Value of Debt in Building Wealth. Each argues that while some debt should be eliminated immediately, other forms can actually improve financial outcomes when managed correctly.
Overview (expanded):
First, let’s be clear: credit card debt is always bad. Credit cards are useful for convenience, fraud protection, and rewards, but they should never be used as a long-term financing tool. The same is true for payday loans, most personal loans, and any high-interest borrowing. These are what the books call oppressive debt. Even small balances compound into large costs over time, making their elimination a first-order priority. Here, conventional wisdom and our framework agree completely.
The more complex question is about low-cost debt — mortgages, student loans, auto loans, and portfolio loans (like margin). Conventional wisdom often treats all debt as bad, but that stance is inconsistent with corporate finance. CFOs routinely use debt strategically as part of a balanced capital structure. Individuals are not companies, but we can borrow from these ideas, especially the insights of Modigliani and Miller.
Low-cost debt is not without risk — but neither is avoiding it. For example, tying all of one’s money into a home can leave someone vulnerable if they lose a job. Conversely, strategic use of debt can:
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Increase returns.
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Reduce taxes.
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And, counterintuitively, reduce risk by keeping resources more liquid.
The Value of Debt framework demonstrates that debt decisions directly affect your quantity of money, and therefore your probability of success and time to goal. Consider two people with identical portfolios: one pays off their house first and only later saves for retirement; the other builds assets first and pays down debt later. The sequence of these decisions leads to very different outcomes.
Traditional planning usually treats debt decisions as outside the model. Outcome-based planning treats them as central — foundational determinants of both probabilities of success and time to financial independence.
Key Takeaways:
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Bad debt = high-interest, oppressive debt (credit cards, payday loans, most personal loans). Eliminate immediately.
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Low-cost debt can be useful when integrated thoughtfully into a plan.
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Strategic debt can increase returns, reduce taxes, and sometimes reduce risk.
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Debt decisions change the quantity of money available, which directly shapes outcomes.
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The sequence of borrowing and repayment choices affects path efficiency — how fast and reliably goals are reached.
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Conventional planning ignores debt; outcome-based planning makes it core to the model.
Applications:
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Individuals: Learn to distinguish between oppressive debt to avoid and strategic debt to use wisely.
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Advisors: Integrate debt into financial planning models instead of treating it as external.
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Enterprises: Build planning and lending tools that frame debt as part of balance sheet management, not an afterthought.
Learn More / See Also:
Value of Debt | The Value of Debt in Retirement | The Value of Debt in Building Wealth | Debt Decision Making | Outcome-Based Planning | Spiral Theory
Video (coming soon):
“Is All Debt Bad? Rethinking Conventional Wisdom”
Academic References:
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James Tobin (Liquidity Preference as Behavior Toward Risk)
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Modigliani & Miller (capital structure irrelevance theorem)
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Robert Merton (lifecycle finance, dynamic planning)
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Thomas J. Anderson (The Value of Debt series, Spiral Theory)
Structural debt
When should I pay off my mortgage?
FAQ: When should I pay off my house? Should I pay off my student loans early?
Answer (Definition):
You should pay off low-cost structural debt (like your home or student loans) only when you have built enough assets to reach financial independence at your desired level of confidence.
You can define that confidence however you wish — surviving a Great Depression, a global financial crisis, or any other stress scenario. Until you have both the investment portfolio and reserves to sustain your independence, low-cost structural debt, like a mortgage, is not harmful. It is beneficial. It’s more path efficient to build assets first and pay down low-cost debt later. Doing the opposite slows your progress. The math is clear.
Overview:
Structural debt refers to low-cost, long-term obligations that appear on your balance sheet — typically mortgages, but also car loans or student loans. For most people, the mortgage is by far the largest. In early adulthood, many individuals start with too much debt — and often the wrong kinds, such as credit cards or personal loans. Later, they take on additional debt to buy a home. Because all debt feels burdensome, they combine and conflate all types as “bad” and begin racing to pay it off.
The problem is that this strategy often leaves people undersaved. Many reach their 50s with low retirement balances and most of their wealth tied up in their house — an illiquid asset that can’t easily fund spending. Worse, the value of the house will rise or fall regardless of how it is financed. Owning the home outright does not make it safer or more productive; it simply changes where your money sits.
The deeper issue is liquidity. Money tied up in your home is hard to access. To reach it, you must refinance, borrow, or sell. The return on paying down a mortgage equals the after-tax cost of debt — but the liquidity cost is high. You can’t rebalance against your house when markets fall, and you can’t access the equity without friction.
That is why it’s inefficient to partially pay off a home unless you can pay it off completely. Until that point, a mortgage is better treated as part of your long-term balance sheet strategy. While it’s important to maintain a small emergency reserve in cash, it’s more path efficient to first build a diversified portfolio of global equities, then grow cash from that portfolio’s returns and savings, and finally use that combined force to pay down low-cost structural debt.
From an academic standpoint, this is equivalent to shifting the capital allocation line upward. Structural debt increases your quantity of money, allowing you to maintain a higher base of productive assets for longer. A higher quantity of money over time compounds more efficiently and shortens the path to financial independence.
Key Takeaways:
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High-cost debt (like a credit card) is always bad.
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Structural debt (like a mortgage) is not inherently bad; it can improve efficiency when managed within a plan.
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Build assets first, then pay down low-cost debt later.
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Money locked in a home is illiquid and can’t be rebalanced or accessed easily.
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Paying down a mortgage too early can delay financial independence by slowing compounding.
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Until you can pay off all of your house, it’s inefficient to pay off part of it.
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Treat structural debt as part of your balance sheet — a tool that raises your quantity of money and enhances path efficiency.
Applications:
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Individuals: Focus on achieving financial independence before accelerating mortgage payoff.
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Advisors: Model path efficiency using structural debt as part of the balance sheet.
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Enterprises: Educate clients on integrating low-cost debt into comprehensive planning models.
Learn More / See Also:
Value of Debt | Housing as a Consumption Preference | Optimization for Wealth Accumulation | The Value of Debt in Retirement | The Value of Debt in Building Wealth | Real World Constraints
Video (coming soon):
“When Should I Pay Off My House?”
Academic References:
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Modigliani & Miller (capital structure theory)
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Harry Markowitz (portfolio selection)
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James Tobin (separation theorem, integration of risk-free assets)
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Robert Merton (intertemporal portfolio choice)
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Thomas J. Anderson (The Value of Debt series, Spiral Theory, Outcome-based planning)
Total Economic Value
Should I be debt free?
FAQ: Should I be debt free? Should I ever pay off my home? Is it good to be debt free?
Answer (definition):
“Should you pay off your home?” is a different question from “When should you pay it off?” When is a matter of math — it can be calculated as a function of your assets, liabilities, and goals. Should is a financial decision — one that affects your balance sheet, your liquidity, and your long-term outcomes.
Overview (expanded):
Net worth is simply assets minus liabilities. Paying off a house does not change your net worth; it changes the composition of your balance sheet. Your assets go down by the same amount your debt goes down. That’s accounting 101, and it’s a mathematical fact.
A common objection is that once you’ve paid off the house, “you own it.” While true, this is an apples-to-oranges comparison. The correct question isn’t whether you “own” your home versus “spending” the money — it’s how that same money would perform in the universe of alternative investments: in cash, in global equities, or in some mix of both.
Another key idea is that the value of an asset is independent of the financing in place around it. This principle, formalized in corporate finance by Modigliani and Miller (1958), means that your house will appreciate or depreciate regardless of your mortgage. When you buy a home, you don’t ask whether the seller had a mortgage — it’s irrelevant to the price. The same logic applies to you: the house’s value stands alone.
Therefore, the financial question becomes twofold:
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On average, and over time, will the return be higher from paying down the mortgage or from investing?
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Independent of return, is owning your home safer?
With respect to return, a basket of global equities has a higher expected return than residential real estate. This is not opinion; it’s an economic identity. If homes had a higher expected return, investors would sell equities and buy houses until prices adjusted. Historically, homes appreciate around 2–5% per year, while global equities compound around 8–10%. There are short-term divergences, but over long horizons, these ranges persist.
Thus, the comparison shifts from appreciation to financing. If the cost of the mortgage is lower than the expected long-term return on the portfolio, then paying off the mortgage early is mathematically inefficient. For example, with a 5% mortgage and a 10% expected return on global equities, it is typically more efficient to:
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First, achieve your global equity target (your desired exposure to productive assets).
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Second, accumulate an equal and offsetting amount in safe assets (cash or short-term government bonds).
Only then — when both sides of the balance sheet are strong — should excess cash flow be directed toward paying down the mortgage. At that point, the decision is not one of survival or efficiency but of preference.
Safety and Liquidity:
But isn’t it safer to own your home? The answer depends on what “safe” means. If someone assumes investing carries no risk (an incorrect assumption), then yes — paying off the house seems safer. But for anyone who believes risk exists, the more cautious you are, the more valuable liquidity becomes.
A fearful investor is actually better protected by holding an amount of cash equal to the mortgage balance than by owning the home outright. The reason is simple: cash gives you options. When risk events occur — job loss, market crash, or emergency — liquidity lets you respond. That flexibility is often most valuable at the exact moment when everyone else is constrained.
Balance Sheet Logic:
Most successful companies carry both cash and debt. They accept an inefficient spread between the two because of real-world frictions and the value of liquidity in a crisis. Corporations manage not only net worth but also enterprise value — the total value of their assets, operations, and flexibility.
For individuals, the equivalent concept is Total Economic Value™ — the sum of assets + liabilities. By optimizing (not maximizing, optimizing) your total economic value, you can often achieve both higher returns and lower risk. Paying off the home too early reduces that flexibility; managing both sides of the balance sheet increases it.
Outcome-Based Planning and Volatility:
In outcome-based planning, every part of the balance sheet is designed to move in service of the goal. This means the investor does not merely endure volatility — they plan for it. When markets fall, the outcome-based investor has both the liquidity and the structure to act, not react. They shift resources deliberately, buying risk assets when prices are low and rebalancing toward safety as goals draw closer. This creates what might be called a planned second-mover advantage: the ability to benefit from volatility rather than be harmed by it. But this advantage only exists if money is available to move. When capital is locked in the home, it cannot participate in these shifts. Liquidity isn’t just convenience — it’s the fuel that allows compounding to continue when others are standing still.
Key Takeaways:
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Paying off a home does not change net worth; it changes the mix between assets and liabilities.
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The value of your home is independent of how it’s financed (Modigliani–Miller).
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Historically, global equities outperform housing; low-cost debt allows participation in those higher returns.
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Path efficiency favors building assets first, then paying down low-cost debt later.
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Liquidity is a form of safety: cash equals optionality in uncertain times.
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Individuals, like companies, benefit from managing both cash and debt to maximize total economic value.
Applications:
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Individuals: Prioritize building global equity and safe asset reserves before accelerating mortgage payoff.
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Advisors: Model debt, liquidity, and investment trade-offs explicitly within balance sheet strategy.
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Enterprises: Design planning tools that calculate optimal sequencing between asset growth and debt reduction.
Learn more / see also:
Total Economic Value™ | Value of Debt | The creation of Balanace Sheet Architecture | Outcome-based planning
Video (coming soon):
“Should You Pay Off Your Home?”
Academic References:
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Modigliani & Miller (1958): The Cost of Capital, Corporation Finance, and the Theory of Investment
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James Tobin (1958): Liquidity Preference as Behavior Toward Risk
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Robert Merton (1971): Optimum Consumption and Portfolio Rules in a Continuous-Time Model
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Thomas J. Anderson (The Value of Debt series, Spiral Theory, Outcome-based planning)
Cash for liquidity and cash as an investment
How much cash should I have?
FAQ: How much cash should I have? Is cash a good investment?
Answer (definition):
Cash should be separated into two categories:
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Cash for Liquidity and Emergencies — to fund life’s short-term needs and absorb surprises.
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Cash for Investing — to serve as strategic fuel for rebalancing and opportunity.
For liquidity, about three months of living expenses is typically sufficient. Less than that can be risky — the “juice isn’t worth the squeeze.” Running too lean on cash rarely improves long-term outcomes, while holding too much is inefficient. There are exceptions, but three months is a good starting point.
Cash for investing is different. It’s not idle money; it’s a deliberate part of your portfolio’s architecture, designed to support your goals.
Overview (expanded):
The separation between liquidity cash and investment cash dates back to James Tobin, a Nobel Prize–winning economist who expanded on Markowitz’s modern portfolio theory. Tobin showed that cash — the risk-free asset — is not a failure to invest; it’s a choice that allows investors to balance risk and opportunity more efficiently.
Cash is one of the most powerful and misunderstood assets in finance. It is universally held by corporations and by nearly all households with a net worth above $50 million. Yet it is often underutilized by those with less wealth, who tend to replace it with bond funds that add unnecessary interest-rate and credit risk. The true value of cash lies in its flexibility: it allows the investor to act when others can’t.
Traditional investing rebalances to a target ratio — for example, 70% stocks and 30% bonds. Outcome-based investing rebalances to a target quantity. If an investor’s goal requires $1 million in global equities, then as markets rise above that amount, the surplus is moved to cash — not bonds. When markets fall (and they will), that cash is redeployed to restore the target quantity of equities.
This distinction changes everything. Rather than letting volatility drag down returns, outcome-based investing uses volatility to lock in gains and to buy more shares when prices are low. Over time, this approach allows the actual return of the portfolio to match the expected return. If global equities are expected to return 9%, this structure makes that 9% achievable in practice, even after volatility.
In inflation-adjusted terms, this means the portfolio compounds at roughly inflation plus 6%. That consistency is what creates confidence — the investor’s planned second-mover advantage. Volatility becomes an ally, not an enemy, because it is built into the plan.
The Balance Sheet Keel:
When viewed through the lens of Balance Sheet Architecture™, cash and structural debt together form the keel of the balance sheet — the stabilizing base that allows the portfolio to move through risk events without capsizing. Cash provides optionality; structural debt extends purchasing power. One without the other can create imbalance: all cash creates drag, all debt creates fragility. Together they form a dynamic equilibrium that anchors the balance sheet while letting the investor rebalance through volatility.
At the extreme, cash combined with an equal amount of structural debt represents one of the most powerful positions an investor can hold. It preserves full liquidity while maintaining exposure to productive assets. You can’t rebalance against your house — but with structural debt and cash, you can reset continuously to your target quantity of global equities. This interaction materially changes outcomes over time.
Structural debt plus cash is not a contradiction; it is the physical expression of flexibility — a real-world gyroscope that stabilizes the investor through changing conditions. This dynamic is captured visually in Spiral Theory™ (Anderson, 2024), which models the interplay of assets, liabilities, and volatility as a continuous path rather than a static point. The spiral shows how balance-sheet design can convert volatility into progress by maintaining structure, liquidity, and alignment with goals.
Key Takeaways:
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Cash should be separated into liquidity cash and investing cash.
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Liquidity cash (about three months’ expenses) protects daily life; investing cash powers opportunity.
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Tobin’s work showed that cash is not a drag but a strategic tool to manage risk and flexibility.
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Cash is the most powerful low-risk asset when paired with global equities.
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Outcome-based planning rebalances to a target quantity, not a ratio — using cash as the bridge.
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Properly structured, this allows actual returns to match expected returns over time.
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Volatility becomes a source of strength: a planned second-mover advantage.
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Cash and structural debt together form the keel of the balance sheet — stability with mobility.
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At the extreme, equal cash and structural debt create unmatched flexibility and control.
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Spiral Theory™ (Anderson, 2024) models this dynamic as a continuous, adaptive system for wealth.
Applications:
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Individuals: Hold about three months of liquidity for expenses, and maintain strategic cash reserves to take advantage of volatility.
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Advisors: Model cash explicitly, not as “leftover,” but as an active part of risk management and compounding.
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Enterprises: Build planning tools that treat cash and structural debt symmetrically, quantifying their combined effect on total economic value.
Learn more / see also:
Outcome-Based Planning | Path Efficiency | Total Economic Value™ | Spiral Theory™
Video (coming soon):
“Understanding cash”
Academic References:
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Tobin, James (1958). Liquidity Preference as Behavior Toward Risk. Review of Economic Studies, 25(2), 65–86.
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Markowitz, Harry (1952). Portfolio Selection. Journal of Finance, 7(1), 77–91.
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Modigliani, Franco & Miller, Merton H. (1958). The Cost of Capital, Corporation Finance, and the Theory of Investment. American Economic Review, 48(3), 261–297.
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Merton, Robert C. (1971). Optimum Consumption and Portfolio Rules in a Continuous-Time Model. Journal of Economic Theory, 3(4), 373–413.
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Anderson, Thomas J. (2013–2017). The Value of Debt series.
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Anderson, Thomas J. (2024). Spiral Theory™: A Dynamic Framework for Balance Sheet Architecture.
Spiral Theory: Debt as a negatively correlated asset
How can I protect my portfolio from a crash
FAQ: How can I protect my portfolio from a crash?
Answer (definition):
The most powerful way to neutralize a crash is to borrow an offsetting amount of money following the crash and reinvest it into the risky asset — typically, Global Equities.
There are limits, and there are real risks. That answer might sound shocking or counterintuitive, but it is rooted in the same principles that underlie modern corporate finance. To understand why, it’s essential to explore the details.
Overview (expanded):
If global equities have a long-term expected return of inflation + 6%, why do most practitioners recommend spending only 4%? The 2% gap is what this framework examines.
In the traditional approach, investors anticipate market shocks by diversifying — for example, holding a 60/40 mix of stocks and bonds. This helps cushion the fall: when stocks decline, bonds may rise or fall less, so the overall portfolio doesn’t drop as much. When a crisis occurs, the diversified portfolio might fall 20% instead of 40%. The investor then rebalances — but only within a smaller base. A million-dollar portfolio that falls to $800,000 may recover, but it begins compounding from a lower starting point.
Diversification softens the blow, but it also locks in lower long-term outcomes. The portfolio never fully recovers to the level it would have reached without the drag from volatility. This is the hidden cost of traditional risk management: by avoiding volatility, the investor reduces both downside and upside.
Outcome-based investors treat volatility differently. They prepare for it — not to avoid it, but to act when it occurs. Suppose an investor enters retirement with an 80/20 portfolio — 80% in global equities and 20% in cash. This is not a forecast; it is a structure designed for resilience. When (not if) a bear market occurs, the outcome-based investor restores not to an 80/20 mix, but to a 100% equity position — fully capturing the rebound.
But what if markets keep falling? Suppose they fall another 20%. The third dimension of wealth management — strategic leverage — now becomes essential. Borrowing against the portfolio to restore it to the target quantity reestablishes the compounding base. The goal is not speculation; it is restoration.
Borrowing 20% after a 20% decline is categorically different from borrowing 20% in normal conditions. The probability-weighted risk is lower because valuations are lower and expected returns are higher. The first 20% of restoration should come from cash — the “fuel” stored during good times. The second, if required, comes from leverage.
A target quantity + cash + selective leverage can be modeled to near certainty — even 99.99% confidence, depending on assumptions and constraints. This is not magic; it is the mathematics of sequence and compounding. By restoring the portfolio’s productive base after negative events, the investor minimizes volatility drag and preserves path efficiency.
This is the essence of Spiral Theory™ (Anderson, 2024) — that the quantity of money is the missing dimension in wealth management. Traditional finance models assets and returns; Spiral Theory adds a third dimension: quantity through time. By actively managing the balance between risk, liquidity, and leverage, the investor converts volatility from a hazard into a resource.
Path Stability and Types of Leverage:
Path stability — the ability to maintain or restore trajectory through market events — can be achieved through structural debt, cash, or strategic portfolio debt. Structural debt is long-term and external, such as a mortgage, securities-based line of credit (SBLOC), or other form of durable financing. Its key advantage is that it is not subject to market risk — it cannot be called due to temporary price movement.
Strategic portfolio debt, by contrast, is drawn directly against the investment portfolio. It offers flexibility and precision but carries market risk: if prices fall further, the lender may require repayment or additional collateral (a margin call). This makes it riskier — but not inherently bad. Risk is not the enemy; unmeasured risk is. Both structural and strategic leverage can be modeled, quantified, and bounded within an outcome-based framework.
For the retiree, pension fund, or endowment, there are two primary ways to restore path stability after negative returns:
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Lump-sum restoration — a deliberate, purpose-driven contribution that replenishes the base after a loss.
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Borrowed distribution — drawing on credit rather than liquidating assets when markets are down, thereby avoiding depletion at unfavorable prices.
Both approaches restore compounding power. In effect, borrowing the distribution during downturns prevents premature asset sales and maintains alignment with long-term return expectations. The key is not leverage itself, but its timing and purpose.
The Third Dimension:
Traditional portfolio theory operates in two dimensions: risk and return. The third dimension — quantity — reveals how structure and timing shape outcomes. When shocks occur, the ability to expand the balance sheet temporarily (through borrowing) to restore productive capital accelerates recovery and narrows the gap between expected and realized returns.
In this framework, debt acts as a negatively correlated asset. It expands precisely when equities contract, restoring the compounding engine. Structural debt is not taken for its own sake; it is used selectively, within strict boundaries, as a mechanism to maintain trajectory.
This process is captured visually in the accompanying animation — a wave neutralizing a wave. One wave (the market decline) is met by an equal and opposite wave (an expansion in balance-sheet capacity). The two forces cancel, restoring equilibrium. This is not metaphorical; it is mathematical. In a frictionless world, the symmetry is exact. The only theoretical elements relate to real-world constraints: interest rates, margin requirements, behavioral limits, and institutional frictions. The math itself is precise — volatility can be neutralized by an equal and offsetting quantity of capital.
The result is not higher average leverage, but dynamic leverage — borrowing less most of the time and selectively more when markets offer opportunity. This is the individual investor’s analog to corporate finance principles: use debt strategically, not perpetually.
Key Takeaways:
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Diversification cushions shocks but permanently lowers the compounding base.
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Outcome-based investors plan for volatility and act decisively when it occurs.
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Restoring to a target quantity after a decline preserves path efficiency.
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Borrowing 20% after a 20% decline is not the same as borrowing 20% before one.
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Cash provides the first layer of restoration; structural or strategic debt provides the second.
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Structural debt is stable; strategic debt is flexible but exposed to market risk.
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Risk is not bad — it can be measured, bounded, and priced.
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Retirees, pensions, and endowments can restore via lump-sum contributions or borrowed distributions.
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Used selectively, debt behaves as a negatively correlated asset — expanding when equities contract.
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The wave image illustrates a mathematical identity: one offsetting amplitude can neutralize another.
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Spiral Theory™ models this as the third dimension of wealth management — the active management of quantity through time.
Applications:
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Individuals: Maintain liquidity and borrowing capacity as part of your plan. Use debt only after declines, not before.
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Advisors: Model portfolio restoration scenarios under different drawdowns to illustrate the compounding impact of path efficiency.
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Enterprises: Develop tools that integrate cash, leverage, and asset allocation to quantify post-shock recovery dynamics.
See Also:
Volatility Drag | Structural Debt & the creation of Balance Sheet Architecture™ | Spiral Theory™ | Outcome-based planning | Path Efficiency
Video (coming soon):
“How Can I Protect My Portfolio from a Crash?”
Image Reference:
Animated visual: Wave Neutralizing a Wave — representing how balance-sheet expansion offsets market contraction to restore path stability.
Academic References:
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Tobin, James (1958). Liquidity Preference as Behavior Toward Risk. Review of Economic Studies, 25(2), 65–86.
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Modigliani, Franco & Miller, Merton H. (1958). The Cost of Capital, Corporation Finance, and the Theory of Investment. American Economic Review, 48(3), 261–297.
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Merton, Robert C. (1971). Optimum Consumption and Portfolio Rules in a Continuous-Time Model. Journal of Economic Theory, 3(4), 373–413.
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Sharpe, William F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19(3), 425–442.
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Anderson, Thomas J. (2013–2017). The Value of Debt series.
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Anderson, Thomas J. (2024). Spiral Theory™: A Dynamic Framework for Balance Sheet Architecture.
The path efficiency of a savings waterfall
How much should I save?
FAQ: How much should I save?
Answer (Definition):
Saving 15% of income with a clearly defined savings waterfall is enough to achieve most goals on traditional timelines. Adjusting the timeline — whether accelerating or delaying financial independence — simply changes the required savings rate. Outcome-based planning makes this math easy: it can calculate exactly how much to save, for any goal, over any time period, with a defined level of confidence.
The savings waterfall provides a clear order of priorities. It recognizes that progress in personal finance is sequential, not simultaneous. When you are on track for your biggest goal, all other goals become easier, not harder. Thus, the sequence matters: focus on foundational steps first, and only when they are complete move to the next stage.
Overview (expanded):
Most people have multiple goals — paying off student loans, buying a home, saving for retirement — and conventional planning treats them as independent. But all goals compete for the same resource: your savings rate. The savings waterfall organizes these goals in an efficient order, ensuring each step reinforces the next rather than competing with it.
The first step in the waterfall is to eliminate all high-cost debt. This includes credit cards, payday loans, personal loans, and “buy now, pay later” programs — any debt with an interest rate above 10%. These debts are the financial equivalent of leaks in a foundation. Until they are eliminated, saving cannot compound efficiently.
The next step is to establish a three-month cash reserve for emergencies and liquidity. Less is risky; more is inefficient. Three months strikes a balance between stability and growth. Interestingly, individuals who (1) save at least 15% of income, (2) carry no high-cost debt, and (3) maintain a three-month reserve report less financial stress than the average millionaire — regardless of their net worth.
Sequential Progress and the Global Equity Target:
From a savings waterfall perspective, what matters is not whether you are on track for your destination, but whether you have reached your destination. Like any journey, progress occurs one stop at a time.
The first stop after eliminating credit card debt and building a cash reserve is to determine how much you need in global equities to achieve retirement on a traditional timeline (for example, age 67, including Social Security). That specific number — your Global Equity Target — defines your initial destination. Until you achieve that dollar amount, all other goals are secondary distractions from the main objective. Once you reach that amount, all other goals become easier, not harder.
Example:
A household earning $100,000 and saving 15% annually achieves roughly $1.2 million in 30 years at a 6% real return. Upon reaching this point, they are effectively financially independent on a conventional path. When Social Security is included, the household is likely overfunded relative to their working income. Social Security, in this sense, functions as a government bond equivalent, providing a stable baseline of lifetime income that complements the risky portfolio.
Once the target is reached, excess savings or investment returns can be directed toward secondary goals — paying down a mortgage, funding college, or buying a second home. The “lake house” becomes easier, not harder, because the compounding engine is already self-sustaining.
Practical Implementation:
From a prioritization standpoint, the waterfall can be split between tax-advantaged and after-tax accounts. A reasonable structure is:
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5% of income directed toward an employer-sponsored retirement plan to capture any matching contribution.
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10% of income directed to an after-tax savings account or brokerage account, where funds can be invested in global equities without significant tax friction or liquidity constraints.
This structure maximizes flexibility and liquidity, while preserving the long-term compounding advantage of equities. It avoids the liquidity trap of overfunding retirement accounts early and recognizes that premature diversification — spreading across too many asset types too soon — reduces compounding efficiency.
Why This Matters:
The path efficiency of this simple prioritization puts financial independence within reach of nearly everyone who has time and discipline. It challenges two major pieces of conventional wisdom:
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That all debt is bad — when in fact, structured low-cost debt can improve outcomes by increasing liquidity.
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That diversification is always good — when early diversification comes at a compounding cost.
When viewed through the lens of outcome-based planning, saving becomes a dynamic process rather than a static rule. The goal is not to meet arbitrary percentages, but to structure savings so that each decision increases the probability of reaching the end goal in the shortest time, with the least risk.
Image Reference:
A Normal Distribution Curve — illustrating the distribution of outcomes across society.
Traditional planning clusters most households below their goal (left of the mean). By increasing path efficiency, the entire distribution shifts to the right: more individuals reach independence faster, with higher confidence.
Savings Formula:
For a taxable account, the approximate savings structure required for 99% confidence through an event equivalent to the Global Financial Crisis is:
Required Savings Target=120%×Global Equity Target
Allocated as:
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80% to Global Equities (expected real return ≈ 6%)
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20% to Cash (liquidity reserve and volatility buffer)
This mix provides near-certainty of success through historical worst-case events when managed under an outcome-based rebalancing framework.
For portfolios that cannot employ leverage, the required savings hurdle is higher, because the ability to restore quantity after drawdowns is constrained.
Key Takeaways:
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Save 15% of income, applied through a defined savings waterfall.
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The correct order:
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Eliminate all high-cost debt (>10%).
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Build a three-month cash reserve.
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Accumulate your Global Equity Target — the amount required for financial independence on a traditional timeline.
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Until that target is reached, all other goals are distractions.
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Once it’s reached, all other goals become easier, not harder.
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Social Security functions as a large, implicit government bond.
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Use tax-advantaged accounts for matches, but direct flexible savings to after-tax accounts for liquidity.
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Avoid premature diversification — it reduces compounding efficiency.
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Outcome-based planning calculates the precise savings rate required for any goal, at any confidence level.
Applications:
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Individuals: Use the waterfall to focus energy on the next milestone rather than multiple competing goals.
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Advisors: Redefine “retirement planning” as a series of sequential destinations rather than a single, distant objective.
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Enterprises: Incorporate waterfall logic into planning tools to help users optimize savings dynamically.
Academic References:
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Modigliani, Franco & Brumberg, Richard (1954). Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data.
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Friedman, Milton (1957). A Theory of the Consumption Function. Princeton University Press.
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Merton, Robert C. (1971). Optimum Consumption and Portfolio Rules in a Continuous-Time Model. Journal of Economic Theory.
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Shefrin, Hersh & Thaler, Richard (1988). The Behavioral Life-Cycle Hypothesis. Economic Inquiry.
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Anderson, Thomas J. (2013–2017). The Value of Debt series.
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Anderson, Thomas J. (2024). Spiral Theory™: Outcome-Based Planning and Balance Sheet Architecture.
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