Three Buckets of Saving

So, how do you invest when the markets are going every which way? Well, the answer is you take a holistic approach to your investing. Most people actually know what it is that they need to do they do not actually do it. First, you need to decide how you will approach the markets and your savings and investing. I recommend a three-bucket approach that is fairly simple, and these are the buckets. Now, mind you that how much goes in each bucket it up to you and your situation. And the three buckets are emergency, retirement, and trading.

The first bucket and in my opinion the second most important is the emergency bucket. In this bucket, you place your six months’ worth of cash for your emergency needs. This bucket is designed to be liquid and accessible in the event you need it. These funds should ideally be in cash or a cash equivalent such as a savings, money market account or maybe even short-term Treasuries, though I do not recommend individual Treasuries but rather a mutual fund or Exchange Traded Fund (ETF). This bucket is also not designed to be profitable like the other two buckets, but its main objective is to be liquid and easily accessible. And if you do happen to make a little profit that is great but in this bucket do not expect a return in today’s environment.

Trading bucket

The least important bucket but the one that has many uses is the trading bucket. Some of the reasons for a trading bucket are to have some fun and show off your talents in selecting individual stocks or funds that are designed to be the riskiest of the three buckets. Here you are free to select the next Amazon, Netflix, or Facebook. This bucket also contains the money that is left over or not allocated to the other two buckets with the emergency bucket being the first to fill and the retirement bucket the second to fill and the most important regarding the overall plan, more on that in a minute. So in the trading bucket, we have money that, if lost, is not going to have a major effect on our financial future. But in the event, you hit it out of the park you can and will be able to have an impact on your overall financial wellbeing. But here the idea is to have a bucket that allows you to take some risks with a small portion of the money you are working with. And finally, this bucket is the one allows you to panic when the markets go crazy like they are now and you are free to buy and sell all you want. This is the panic bucket for turbulent times and the only one that you are allowed to buy and sell at will in. The others are in a do not touch zone under any circumstance.

The final bucket and the most important is the retirement bucket. This is the bucket that will sustain you for your entire retirement years, which could be more years than you worked before retiring as people are definitely living longer. This is the bucket that will most likely have more growth than you expect it to have and is the one that you will fund the most and with regular contributions. This is a long-term invested bucket that you will invest in a broad range of assets and make sure it is fully diversified. Then you will basically set it and forget it except when you do an annual review to rebalance to keep it in line with your investing goals. This bucket is not allowed to be bought and sold due to market conditions, again that is what your trading bucket is for.

Ups and downs of the markets and investing

Here we will weather the ups and downs of the markets and stay the course and keep investing on a regular basis. If the market is up, we will buy monthly or quarterly and buy as many shares of the investment as we can. Then when the markets are down, we will still buy the same investments, but more of them as the price is now lower. By doing this, we will average our costs over a long period and thereby reduce of costs of each investment. And by being diversified across many different asset classes, and hopefully different parts of the world, we will reduce our overall risks as well. Then by setting up this bucket correctly, you will sit back, contribute to it on a regular basis and let the power of compound interest take control and watch it grow steadily over hopefully decades.

Then when you do retire you can make a withdrawal from the retirement bucket in small portions and then only what you need to live. And by doing this, you allow the remaining portion of the bucket to make you money and grow while you are in retirement. That is key to having enough money to last you for what could be thirty plus years. A lot of people make the mistake of becoming too conservative, and their portfolio does not continue to grow, and they deplete their principal and will eventually run out of money.

Now you have a good idea of what it is you need to do with your money to be successful not only for your working years but in retirement as well. These three buckets are key to investing success, and if you need assistance, please reach out to a qualified financial advisor to assist you. Many people are indeed capable of setting up the buckets and establishing their investing plans but lack the discipline to avoid the mistake of selling and buying in the retirement bucket. This is where a good financial advisor can keep the emotions out of the equation and hopefully keep you from making the mistake of messing with your most important bucket.

If you have any questions or comments, I would love to hear from you. Please feel free to leave a comment here or message me directly, and I will be more than happy to assist you.