The world of financial planning can be tricky to navigate. There are so many options to choose from when building your financial plan. This strategy is suitable for people with substantial savings and those who are just starting out. It’s a great way to simplify the financial planning process.
Bucket one is designed for very short-term needs that may occur in the next year or two. These are items that cannot be paid for out of your normal cash flow. That would include money set aside for your emergency fund, an upcoming car purchase, home remodel, or other large one-time expenses.
The timeframe of this bucket is too short to invest in assets that could lose value. In your short-term bucket, you want to have enough to cover the costs of short-term expenses. For retirees, you can keep up to two years of living expenses. These funds are held in liquid accounts that are easily accessed. These type of accounts are savings/checking accounts, liquid CDs, or money market accounts.
Bucket two holds money you need for goals three to nine years out. The goal of a mid-term bucket is to save money with the potential to grow in value and incorporate strategies that seek to reduce market volatility. Since you have already established bucket one, you can afford to take on a little more risk with these assets. This could be for college savings, a second home purchase, or future living expenses.
This money should be held in accounts you can access without restrictions or penalties. If you are a pre-retiree (59 or younger) this would be in your taxable account or one of the accounts listed in bucket one. The investments would include a mix of assets from bucket one, stocks, and bonds.
Bucket Three is your long-term savings for retirement. This is money you do not plan on touching for 10 or more years. Due to the duration of this bucket, you can afford to take on more risks. While cash protects you from downside risks, it provides no growth and no protection from inflation.
The funds would be held in retirement accounts like a 401(k), 403(b), IRA, etc. Normally these are tax-advantaged accounts that are meant for long term savings. These types of investments may include stocks, bonds, real estate, or commodities. The long-term bucket can include investments that provide a hedge against inflation. This could help savers protect themselves against the risk of outliving their assets.
The three bucket approach will help you segment your savings and provide a strategy that could prevent you from taking excessive risk or not enough risk with your investments. As with any investment strategy, it’s important to seek a professional’s advice to create a plan that best fits your individual situation.
Disclaimers and Definitions:
Money market: refers to very short term debt instruments
CD: A certificate of deposit (CD) is a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time
Securities offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Investment advisory services offered through PMG Wealth Management, Inc. a Registered Investment Advisor, and separate entity from LPL Financial.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Bank CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.? Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investments in real estate may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Other risks can include, but are not limited to, declines in the value of real estate, potential illiquidity, risks related to general and economic conditions, stage of development, and defaults by borrower.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
Limited partnerships are subject to special risks, such as potential illiquidity, and may not be suitable for all investors.