I was recently reading an article that referenced Pledged Asset Lines (PALs).

Familiar with these?

A PAL is a line of credit backed by your taxable investment account. Rather than selling investments (and potentially triggering taxes or disrupting a plan), you borrow against the portfolio. When used prudently, it can be an efficient short-term liquidity tool. When used imprudently, it can create unnecessary risk and compound financial stress.

While PALs are something we periodically discuss with clients, it got me thinking about where they fit in the broader planning conversation.

A shower thought came to mind the other day: Liquidity Ladders.

The idea that we should all have a mental model for where to reach first for cash when opportunity, emergency, or a meaningful unexpected bill hits.

Too often, when liquidity needs arise, people make poor decisions under pressure.

They:

• sell the wrong assets
• borrow the wrong money
• trigger unnecessary taxes

Candidly, this was also a personal exercise for me.

My wife, Arabelle, and I are both business owners and currently four months post-partum with baby number three, Katrina. Yes – plenty to be grateful for. But also a season of life that has us feeling pinched: pre-/post-natal bills arriving, private tuition due for our two boys, a new daycare expense, and we self-funded maternity leave (i.e. carrying the fixed overhead of a dental practice for three months with no dentistry income).

Woof.

And now, for those (like us!) who have more than a basic W-2, one of the nastiest liquidity squeezes of the year:

• 4/15: Settling prior year taxes
• 4/15: Self-employment retirement contribution top-offs
• 4/15: Q1 current year estimated taxes
• 6/15: Q2 estimated taxes coming up

High Net Worth ≠ Liquidity

Even the affluent can feel cash tight at times.

A few instances where I witnessed a regrettable decision in the heat of a liquidity crunch (I was consulted on all three after the actions were taken):

• One took a 401(k) distribution and got hit with ordinary income taxes + a 10% early withdrawal penalty.
• Another sold the family’s cherished vacation home and recognized a massive taxable gain.
• Another borrowed on margin to cover a tax bill in early 2020… right before the COVID crash. What was meant to be a short-term bridge turned into forced selling during a 30% market drop.

All these individuals pulled levers that felt reasonable in the moment.

Under pressure, we fall back on structure.

If our liquidity isn’t structured (or we’re lacking a mental model for utilizing it effectively), pressure (and the accompanying emotions!) makes the decision for you.

The Liquidity Stack

When it comes to cash, there are inherent tradeoffs between accessibility, cost (both opportunity cost + usage cost), and taxes.

Here’s how I think about it:

Tier One: Planned Liquidity (Cash Buckets)

At minimum:

• A Tax Reserve Bucket – non-negotiable for anyone with variable income
• An Emergency Bucket – 6–12 months of personal runway

Once those are in place, I typically recommend two additional layers:

• Anticipated/Upcoming Expense Buckets – vehicle purchase, renovation, major travel, or other known large outlays
• Strategic Opportunity Bucket – pre-allocated capital for public equity “buying the dips” or non-public investments (i.e. private deals, business buy-ins, real estate moves, capital calls etc.)

If you see yourself as an investor, you should have capital designated for investing.

These Tier One funds are not designed to maximize return. They’re designed to provide certainty.

That typically means parking cash in high-yield savings accounts, Treasury bills, or short-duration vehicles.

One nuance for larger balances: traditional FDIC coverage insures up to $250,000 per depositor per bank. Some platforms (like Flourish and others) extend coverage into the multi-million range by spreading deposits across multiple partner banks.

In Tier One, security and accessibility matter more than squeezing out an extra 0.50%.

Tier Two: Intentional Asset Sales

Sometimes the cleanest move is simply to sell.

But do it deliberately:

• Trim appreciated positions
• Harvest losses to offset gains
• Manage capital gain brackets intentionally

A wise old tax planning sage I worked under at Goldman drilled into us:

“Don’t let the tax tail wag the dog.”

Taxes should inform decisions, not drive them.

While we’re on the topic, and in my own armchair estimation, most high earners would generate more real-world alpha through proactive, multi-year tax planning than by trying to outpick the market.

We’re living in a historically low tax regime.

For many households, thoughtful gain recognition today (paired with loss harvesting, bracket management, or future income smoothing) can be smarter than indefinite deferral.

Tier Three: Strategic Borrowing

This is where tools like:

• A HELOC (secured by your home)
• A Pledged Asset Line (secured by taxable brokerage assets)
• Margin (brokerage borrowing with stricter maintenance requirements)
• Policy loans in certain insurance structures

can serve a purpose.

These tools work best when:

• The liquidity need is temporary
• Cash inflows are expected
• Asset sales are suboptimal due to timing
• Downside scenarios have been modeled

Borrowing is not inherently reckless. But borrowing without structure (i.e. a defined exit plan!) is.

Leverage should increase flexibility, not fragility.

A PAL, for example, can be a smart bridge if you’re buying before selling, deferring gains into a lower-income year, or covering short-term timing gaps.

It is not a substitute for a tax reserve.

Tier Four: Borrowing From Tomorrow

This includes:

• High-interest consumer debt
• 401(k) loans & early withdrawals
• Retirement account distributions

Tier Four is survival mode.

We’ve all heard the story of the founder who maxed out every line of credit before hitting it big. I hate to be grim, but assume you’re not that person. Or at least, don’t build your liquidity plan around becoming that person.

When you lean on high-interest debt without a clear exit plan, or liquidate retirement capital to solve a short-term squeeze, you’re not fixing liquidity. You’re transferring the pressure forward and shrinking the very compounding engine that likely built your wealth in the first place.

Final Thoughts:

PALs are a tool. So is margin. So is selling assets and paying taxes.

None of them are inherently good or bad.

What matters is whether you’re choosing or reacting.

Life is not linear. The variables are endless. Kids. Businesses. Aging parents. Markets. Taxes.

While liquidity won’t make you wealthy, it will keep you steady and in a position to ultimately make better decisions.

Build the ladder now so when pressure hits, you don’t panic – you just move to the next rung.