Thinking back to one year ago, it is absolutely incredible to revisit the impacts of the “financial medicine” thrown at our markets and economy. SIX TRILLION DOLLARS of stimulus has led to all-time highs in stock market values and many families find themselves with more cash on hand than they expected. There’s never been a better time to re-evaluate your spending and savings priorities and implement new techniques to get the most out of your money.
Using a bucketing system can help you unlock your financial goals – and set you up for savings success.
Investing your money can be a rewarding feeling, but there’s no better feeling than spending your hard-earned money in ways that contribute to your own personal fulfillment and wellbeing (did someone say lavish trip to the Bahamas, or a new kitchen remodel?).
Whether you’re saving for an extensive trip, or planning a small home improvement project, financial bucketing is a simple and highly effective way to earmark your funds to reach your goals. Whatever your goals might be, we can help you decide whether to pursue an investment strategy or maintain your savings as cash.
What is financial bucketing?
When using the financial bucketing approach to money and savings, different “buckets” will hold cash, bonds, stocks, or other assets. The buckets will be allocated based on when you will need to use the money in that bucket.
This financial planning technique will often have one bucket allocated for cash funds, another bucket allocated for a fixed income, and a third bucket allocated for growth. Of course, the system should be tailored to your individual goals and your individual financial situation, so you may have multiple buckets under your plan with us.
Financial bucketing has a number of advantages including reducing overall stress and increasing flexibility by providing a cash cushion, while isolating your more risky investments. What’s most important is picking a type of financial planning that works for you. Looking to know more about this technique? Here’s the strategy we use at Arsenal:
Short-term (“now”) bucket
Short-term buckets should be focused around goals coming up in the next few months. In these buckets, you’d be saving for an upcoming trip, new furniture or car purchases, or any other significant purchases. At Arsenal, we put a timeframe on the “now” bucket from next week to next year (0 to 18 months). This bucket should generally be uninvested and liquid…despite the fact that banks are paying you next to nothing. Better to have return OF your principal versus return ON your principal for this particular bucket.
Medium-term (“near future”) bucket
We peg a timeframe of 18 months to 5 years for the “near future” bucket. Some of these goals might include home down payment, or a home renovations (mini bathroom remodel, anyone?)…over even that first tuition bill in 2025 for your now-high school freshman.
An 18-month to 5 year timeframe begins to open up investment opportunities. As HBO legend Larry David may suggest, “Curb Your Enthusiasm” when it comes to responsibly investing money with an 18-month to 5 year horizon. We would suggest that this near-term of a goal should not be invested in all stock or stock funds. Additionally, be aware that fixed rate investments currently have historically low yields. This puts more pressure on cash flow and saving enough for “near future” goals given possibly muted returns.
Long-term (“it can sit”) bucket
Do you have funds you feel confident will sit for more than 5 years? Long-term goals include saving for that cottage in Vermont, helping your child cover their first 2 years at Northeastern, and any other goals that might take a few years (or more!) to achieve.
The tough thing about saving for something that is years away, the cost of each of these goals will get more expensive over time. Yes, that dreaded I-word (INFLATION) people have been talking about lately. If the cost of a long-term goal (like a second home) may double over the next 20-years, better make sure that money in the “it can sit” bucket is positioned to work for you and not rot away in a big-bank checking account at 0%.
If you’ve spent the past year at home, there’s no better time to re-evaluate your savings goals and spending priorities – and put your plans into action. You may even be implementing a financial bucketing system. No matter the goals, we’re here to guide you towards smarter financial decisions that will have a big impact right now, and in the future.