The Three Buckets of Financial Planning
I am very passionate about being able to explain complex concepts in a simple way that people not only understand but can apply to their own situations. Financial planning can certainly be a very complex subject. In fact, for some people, it is overwhelming to even think about. However, not thinking about it is not really the best option. I tell my clients that financial planning is simple. It's not easy, but it's simple.
In my initial discussion with my clients, I tell them that I have a three-bucket approach to financial planning. I believe that everyone needs to have three buckets. What follows is a brief description of each of the three buckets. In individual client meetings, I go into greater detail about each one.
Bucket number one. This is the unplanned-for expense bucket, commonly referred to as an emergency fund. While that may be a good way to describe it, most things that the money in this bucket is used for do not fall into the category of emergencies. Also, money held in bucket number one should be used for anything that can't be paid for out of cash flow that will happen in the next 6 to 12 months.
Bucket number two. This is your financial goal bucket (or maybe the dream bucket). The time frame for this bucket should be at least 1 year and could be 2 to 5 or even to 10 years. Basically, anything that you are saving for that you can't pay for out of your normal cash flow and that has at least a 1-year time horizon or longer should be saved in bucket two. This bucket also includes where you would set aside up to six months' worth of income (or expenses).
Bucket number three. This is your retirement bucket. Any funds that you have saved specifically to provide income when you retire (subject to early withdrawal penalties prior to reaching age 59½) would fall into the third bucket category. Traditional, Roth, SEP, and SIMPLE IRAs as well as 401(k)s and 403(b)s are bucket number three vehicles.
Do you have three buckets? If not, please call us so we can help you put these buckets in place for you.