The Three Buckets Principle

By
March 6, 2019
Share on:

The world of finance is tricky to navigate. With so many options available for your investments, it can seem complicated and daunting when trying to plan for your financial future.

The three buckets principle is a way of simplifying the complex and is suitable for people with substantial savings as well as people who are just starting out. Whether you’re well established in your career or fresh out of college, setting up your three buckets should be a priority.

How does it work?

The three buckets are:

  • Bucket 1: Emergency Funds
  • Bucket 2: The Goal Bucket
  • Bucket 3: Retirement Bucket

Bucket 1 – Emergency funds

Expect the unexpected and make sure you’ve planned financially for it.

Unanticipated costs can be devastating financially. Getting laid off work, writing your car off or escalating medical costs, for example, can set you on the financial back foot for many years.

Bucket number 1 creates a buffer of cash that is only to be used for such emergencies. By having this bucket available, it means that should the need arise you won't be dipping into other savings or going into debt to cover the cost.

How much to save in your emergency fund bucket

Aim to have 3-6 months’ worth of living expenses here. Add up all your monthly costs, such as mortgage, bills, transport costs, and groceries, and that will give you the total to aim for.

Bucket 2 – The goal bucket

This bucket is for your short to mid-term financial goals. Savings for your kid's college, a down payment on a house, or even saving for a vacation can go in this bucket.

How much to save in your goal bucket

This is effectively disposable income so anything left over after you’ve attended to your monthly outgoings and buckets 1 and 3 can be added to bucket number 2.

If you've managed to fill bucket 1 already, you can use that cash to start filling bucket 2.

Bucket 3 – Retirement bucket

It's never too early to start saving for retirement, so you should aim to have this bucket set up as soon as you possibly can, ideally, as soon as you enter the workforce.

How much to save in your retirement bucket?

Aim to save 15-20% of your gross income for retirement. If your company offers a 401(k) plan, deposit part of your bucket 3 money there. If you don't have access to a 401(k) plan, consider a Roth or traditional IRA to maximize your investment.

Bucket 3 is made for investing as you want to maximize your returns for your golden years.

These three buckets will help you successfully save for your future. It's a good idea to attend to buckets 1 and 3 first. Once you have them filling nicely, you can look to start filling bucket number 2.

This simple strategy is easy to follow yet priceless for effective financial planning. If you haven’t got yours set up yet, make it a priority to do so.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

You may also like:

By
Mike Loo, MBA
April 16, 2018

Have you ever noticed when you turn on the news, the media is either panicked because the markets are down or celebratory because the markets are up? This may make for fun entertainment, but it can also impact people’s emotions, which are dangerous when they affect investment choices and financial decisions.

While you shouldn’t hide your head in the sand when it comes to the news, there’s a fine balance between staying up-to-date and obsessively following every market change.

The Problem with the News

Many people think watching the news will help them decide what financial or investment decisions to make. The problem with this is that the news is late, especially in terms of investing.

Capital markets efficiently price in all widely known information. As soon as news is available to the public, it becomes reflected in share prices. Therefore, looking at the same things as everyone else doesn’t give you a leg-up on other investors.

Additionally, we know that most news stations have a bias or slant. Many major networks tend to lean either right or left, and this can actually impact the type of actions they suggest in terms of financial decisions. Furthermore, when their guest is the head of a bank or works for a credit card company, you’ll want to be aware that their advice may be biased.

The Information to Turn to Instead

One of the best solutions is to ignore the pundits and spend more time sticking to your personal financial strategies and investment plan. It may sound crazy for me to suggest this, but I’ve found that it helps my clients feel less stressed and less likely to make emotionally driven decisions.

It takes training to tune out the media noise levels and focus on your long term plan. It is tough to do, but with a little coaching, you can feel less stress from media influence and more focused on your plan.

Let Your Advisor Do the Heavy Lifting

While working with a financial advisor is a collaborative approach, requiring work on both ends, it can be helpful to rely on your advisor for staying up-to-date on financial news and investment trends. Part of an advisor’s job is to stay current with financial news and changes in the markets. Your advisor will then suggest changes, if needed, based on your personal goals and needs.

Stick to Financial Wellness Tips

While listening to the news and recommendations of pundits can lead to emotional decision-making, reading general articles and blogs about financial health and wellness can be beneficial, and even motivating. There are hundreds, if not thousands, of blogs out there that share tips on sticking to a budget, savvy ways to save money at the grocery store, and how to find the best credit card rates. These sources of information can help you maintain a healthy outlook regarding money and keep you motivated to stick to your financial goals.

How I Can Help

As an independent advisor, my personal goal is to provide my clients with guidance that can help them understand and better define their financial goals. I stay up-to-date with the latest financial news, trends, and market shifts so my clients don’t have to. I hope to allow them the time to focus on their passions in life knowing I am here proactively monitoring their investments and financial strategies.

To learn more about how I can help you focus less on media noise and more on your passions in life, contact me for a no-strings-attached meeting. We can discuss your goals what strategies can help you pursue them. Call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.

By
Jeff Motske, CFP®
February 25, 2019

Coming from sunny southern California, there’s nothing quite as nice as an aimless, leisurely drive down the coast. As delightful as that is, it’s not a metaphor for life. Life is complicated and moves fast. It’s easy to get sidetracked. That’s why when it comes to any of your goals, especially financial independence, a clear vision of what you’re working towards and a developed idea of the best way to get there will keep you in route to your goal. Many folks have a general idea of where they want to go. They want to be fiscally responsible, perhaps investing in a home and saving for retirement while still prepared for the financially unexpected. However, 1 in 3 Americans have less than $5,000 saved for retirement and only 16 percent of those surveyed had more than 15 percent of their income saved. We know that most people have good intentions. So why do their actions take them so far away from their goals?

It all comes down to that lack of a map – not having a well-defined goal and detailed route to get there. Yes, it’s good to know that you want to be fiscally responsible, but if you don’t have a detailed definition of what that means, how do you know when you’ve achieved it? What are you saving for? How much do you need to save for retirement and how much do you need in your emergency fund? What other financial goals do you have, and which ones take priority? Lacking those details may make it easier to get distracted by impulse purchases or detoured by a financial commitment that might not be the best for your budget or your long-term financial goals.

Once you have the destination, then you need to determine the most direct route to get there. Do you have a distinct budget for all your needs and your goals? Are you going to have a monthly amount deducted from your account to your savings goals? Have you considered the influences that work against your goals and what you might do to counter them? Having a distinct plan doesn’t mean that everything is settled. Circumstances may arise that distract or reprioritize your goals. Having a definitive plan, though, can help you recalibrate your course and prevent you from being shifted away from your goals long-term.

The road to your financial independence is oftentimes anything but direct. Between relationships, families, career, health and everything in between, it’s easy to lose sight of your goals. Yet, by thinking things through and creating a detailed plan, we can stay on course. Despite every fork in the road, every decision that tempts us away from our goals, we are able to remember what we’re saving for and the right steps we put in place to get there, which makes it easier to stay on course to our financial independence.

  1. https://www.cnbc.com/2018/08/27/1-in-3-americans-have-less-than-5000-dollars-saved-for-retirement.html
  2. https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-americans-save-little-or-nothing.html

Get Started on Your Financial Life Plan Today