The Three Buckets
Money. In many ways, it's a tricky concept that introduces both opportunities and challenges.
Many people find it empowering to organise their finances into categories. This allows them to determine whether their money is organised - and used - in a way that is in line with their intentions.
When it comes to retirement planning in particular, one way to organise your money with intent is to use the "Three Buckets" method.
This involves dividing your money into three categories:
- Liquidity (cash)
- Lifestyle (spending), and
- Legacy (savings for future generations)
The liquidity bucket should contain enough money to cover your immediate expenses, such as bills, groceries, and any unexpected costs that may arise. This is the money that you'll need to have readily available to meet your day-to-day needs.
Typically, people look to have enough money on hand to feel psychologically safe through the ups and downs of stock markets, business cycles, and life events. We want to be sure that your spending or lifestyle will not be unexpectedly restricted or cause you to sell assets at exactly the wrong time (i.e. sell low).
Within the liquidity bucket, you want to have enough operating cash to cover your typical lifestyle expenses for 2 years, plus any additional cash needed to cater for taxes, big purchases, business expenses, and the like. Many people also say they like to have "dry powder" available for opportunistic, attractively priced investments (so when others are selling low, they can buy low).
- How much liquidity, or cash, do I have on hand?
- Is it providing me the freedom to do what I'd like when I'd like to do it?
This bucket might include actual cash in your wallet or purse, as well as money in your current account, savings accounts and fixed-term deposits.
It's important to have enough liquidity to cover your short-term needs, but not so much that it's not working for you (earning little or no interest).
Learn more about the liquidity bucket.
This bucket's contents are specifically tailored to an individual's or family's definition of lifestyle. It could include anything from spending on necessities to educational funds for children and grandchildren to gifts for family and community.
- Am I building a pot to fund my lifestyle in retirement?
- If so, am I doing enough?
- Is it too much?
- What if a life event left the principal earner in my household unable to work?
This bucket frequently includes a portfolio of stocks, bonds, and cash (to replenish the liquidity bucket regularly).
It's great to have wants and desires, but it's crucial to have a plan in place to achieve them.
To fund your lifestyle bucket, you'll need to save and invest your money wisely. This may involve setting up a budget and tracking your spending to ensure that you're saving enough to meet your goals.
It's also important to have a diversified investment portfolio to help protect against market volatility and to potentially earn higher returns.
Learn more about the lifestyle bucket.
While the first two buckets contain money set aside for use during your lifetime, the third bucket contains money set aside for use after your lifetime.
However, there is some wriggle room here.
If the lifestyle bucket is depleted too soon due to factors such as longevity (what if you live to be 110?), the legacy bucket can provide a minimum level of wealth. Furthermore, this bucket may be used for family gifts, either outright or through more complex wealth planning structures.
Interestingly, some of our clients have stated that they have no intention of leaving money to others after their deaths, which may imply that this bucket is irrelevant to them.
But, if it applies to you, how does your legacy bucket look? Insurance policies, pension policies, trusts, IHT-friendly investments, and other strategies can all be effective tools here.
Think about the people who will be the beneficiaries of your assets and how your decisions will impact them, as this can motivate you to be more intentional. Before making any decisions, it can be helpful to imagine the future and consider the impact you want your assets to have on your family and community.
Learn more about the legacy bucket.
The "Three Buckets" method can give you confidence to directly address some basic but critical questions, such as:
- Where exactly is my money?
- Is it achieving what I want it to?
- Will I have enough in the event of a crisis?
- Will my wealth have the desired effect on my family and community?
By dividing your money into these three categories, you can ensure that you have enough money set aside for your immediate needs, while also preserving your wealth for the future.
For a more detailed discussion on this topic, please feel free to contact us. Our team are always available to answer your questions and to help you with any of your financial planning needs. Here’s what we offer: A cup of coffee… and a second opinion.
"The trust and feeling of comfort has grown over the eight years since our first meeting."
"They are good listeners and make thoughtful recommendations that are relevant to what we are trying to accomplish in our lives."
"Working with them on my long-term financial plan has been a source of comfort since my husband's passing."
Our job is to make sure that every decision you make moves you closer to your goals.
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