Three Buckets—A Simple Concept For Financial Health
By Rob Wrubel, CFP®, AIF®
One concept I like to use in helping people think about their money and to keep life simple is to think of having three different buckets for money.
The first bucket holds funds for short term needs.
The second holds money and investments for mid-range goals.
The third bucket holds money for long-term goals.
This concept can help make financial planning and management easier to handle over time.
Most people I meet with and hear from at groups are overwhelmed with information—financial, medical, employment, school—the list is basically endless. Most of us key in on the information that jumps at us the loudest or is most important right now. My daughter had to have blood drawn this morning to check her thyroid function and to see if the dose of her synthroid is correct. We will find out in a few days and this will be the most important information for my family over the next few days.
The three buckets can help set up a simple way to keep you on track even as your attention moves to other issues and daily living.
The First Bucket
The first bucket holds money needed for any immediate or short term needs. This bucket holds your emergency funds. Most financial planners recommend you hold anywhere from three months to six month of spending needs that is in easily reached accounts. This is not money in your checking account but cash reserves held in your bank or investment accounts.
I also call this boring money. It sits there. It might not even earn interest. You keep it as safe as possible in case you have a medical emergency, lose a job or need to replace a vehicle quickly.
This bucket also holds money for purchases you expect to make over the next year and maybe even up to two or three years. This includes your money to purchase a car, down payment on a home, for a medical procedure or significant life event coming up soon.
Funding. You should fund your first bucket with some savings each month. Once you reach your three to six months emergency fund you can start putting some of this money towards other short term goals or redirect to the second bucket.
The Second Bucket
The second bucket will hold a mix of investments in money market funds, fixed income and equity securities.
Money in this bucket needs to keep pace with inflation (and maybe a bit better) between the time you save it and need it.
This bucket could include money you are putting aside for education purposes. It might be money you expect to use to cover the gap in covered expense from when your special needs person turns 18 to when comprehensive services are available. You may have money here to cover weddings. One client of mine had a need to replace hearing aids every three years. Some of this money went into the second bucket type of account.
Typically, money in this bucket is held in taxable investment accounts. The exception might be for education needs and this will depend on the age of your children and any available tax breaks on certain accounts. The money in this bucket needs to be accessible and to not have any tax penalties or consequences when withdrawn.
Investments in this bucket will be moderate for most people. Bonds and other fixed income securities have typically been used to generate income and to dampen volatility. The equities are used for growth and to keep pace with inflation. You will have to determine the right mix for you. Once it is set, have your monthly contributions continue to purchase the same securities.
The Third Bucket
The third bucket contains your assets geared for growth. You want money in this bucket to make money. You want the potential of compound interest to work in your favor over time. This is generally the most aggressive set of investments you will have. Your particular circumstances, like how close you are to retirement, will impact your investment profile.
Ideally, you look for tax protection in these buckets. Retirement funds for you will likely be in a company retirement plan like a 401(k) or in your own IRA. Most families find it easiest to save when money goes right to the retirement account before ever coming to the checking account.
Investments you plan to use to fund a special needs trust will likely be saved in the third bucket. Special needs families cannot usually fund a tax-deferred or advantaged account to save for special needs expenses or to fund a trust. Life insurance is sometimes used but families must take time to understand the complexities of these products and restrictions impacting the use of the cash value over time. The right account type for your family can provide flexibility and access.
The buckets work for people just getting started or with significant assets. It helps you understand the purpose of each account, asset and tool you have to be able to use towards life’s goals.
Call me at Cascade Investment Group if I can be of help in working with you on your special needs planning and investment management.
Rob Wrubel, CFP,® AIF® is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.