Finding the Right Fit: Selecting the Right Financial Role Model for You

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.

Retirement is a big deal, and there are a lot of moving components to plan out. Those issues multiply when there is another individual added to the mix. My definition of retirement is the financial freedom to move into the next chapter of your life, and that next chapter is different for everyone –especially spouses! This is not the time to assume the two of you are on the same page or decide that the two of you will figure it out later. Most people know that I’m a big proponent of talking to your spouse about everything financial, and retirement is no exception.  Be sure to take the guess work out of this process so you can enter the next chapter of your life in harmony.

It’s not uncommon for couples to not see eye-to-eye on retirement. About half of couples don’t agree on what age to retire[i]. Less than 10% of surveyed couples retired at the same time[ii]. And 47% disagreed on how much they would need to save for retirement[iii]. With so many areas to disagree, from where to retire to how to spend your days, how do spouses work together to achieve their cumulative goals?

I always like to recommend the couples start off by taking my financial compatibility quiz. Not only does this show the areas you may not see eye-toe-eye on, but the quiz generates a lot of conversations. Continue these conversations at monthly financial date nights to make sure that the two of you continue on the same path towards the same goals. Talk about the details – at what age do you want to retire, how do you want to spend your days in retirement, and how much of that time will be spent together. Keep in mind that most people have spent over 40 hours a week away from their spouse for decades. Retirement frees up all that time, which can be too much “togetherness” for some couples. This is why I like to take my clients through a discussion on “your time, my time, and our time,” well before it is actually time for retirement. Discussing these things in advance can allow you to compromise on issues before emotions flair and make a world of difference between living together happily in retirement or, in worst cases, filing for divorce.

Once you have an idea of what your retirement goals are, you need to formulate a plan. An experienced financial planner can be a great resource at this time, bringing up things you may not have touched on and running “what if” scenarios for you to see how your retirement dreams can be converted into actionable goals. Please start these discussions early because financial independence takes many forms, but you can’t figure out when you’re going to get there until you plan your route.

Marriage is many things, but ultimately, it is a partnership. The two of you work together to move the household forward. You may not always agree, but you find common ground by talking and sharing and compromising. If you plan ahead and plan together, you can find the right way to your coupled vision of retirement.

Take our FREE Financial Compatibility Quiz here.

[i] https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/couples-retirement-fact-sheet.pdf

[ii] https://assets.aarp.org/rgcenter/general/retired_spouses.pdf

[iii] https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/couples-retirement-fact-sheet.pdf

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