Becoming Financially Capable Series- Budgeting: Three Buckets of Money
In today’s inflationary environment, budgeting and saving money can seem like a daunting task. Whether it is creating an emergency fund, saving for retirement, or budgeting for vacation, it can feel like it is impossible to check all of these boxes. However, we believe there is a way to balance saving for the short-term, intermediate-term, and long-term by separating these three goals into what we call the “Three Buckets of Money.” The Three Buckets of Money method is comprised of saving money in three separate “buckets” that are filled in a specific order based on their necessity. With the help of the Three Buckets of Money method, you can simplify the budgeting process and begin building towards your future financial goals.
The first bucket that you should budget for is the Short-Term Bucket. The Short-Term Bucket, also known as the Emergency Bucket, is where you should focus on building your emergency savings. When we refer to emergency savings, this is money that you set aside for unexpected expenses like short-term medical costs, job loss, natural disaster damage, car repairs, and more. While there is no true definition of how much is required for your short-term bucket, we generally recommend your emergency savings be large enough to cover at least three to six months’ worth of expenses. By establishing a strong emergency fund, you can give yourself peace of mind and avoid taking on
debt when unexpected expenses arise.
Once you have filled the Emergency Bucket, then you can begin to focus on the second bucket. For the second bucket, we actually skip ahead to the Long-Term Bucket, also known as the Retirement Bucket. The Retirement Bucket, as the name suggests, is where you should focus on saving for retirement. Generally speaking, this will include things such as contributing to an IRA, 401(k), 403(b), and more (we will go more in-depth with these types of accounts in a future newsletter). The earlier you start saving for retirement, the more time you give your second bucket to grow, giving you a larger nest egg to rely on in the future. For an employer retirement plan like 401(k), a general rule of thumb is to at least contribute enough to get your full employer match, which is “free money” that your employer will add to your 401(k). If you can’t afford to contribute enough to get the full match, even just contributing enough to get some of the match money is a good start. It is important to note that, while the Emergency Bucket can be checked off your list once it has been filled, the Retirement Bucket works a little differently. We don’t expect you to be able to fill your entire Retirement Bucket overnight- it’s not practical. However, if you are able to systematize your retirement savings in some way, such as consistent 401(k) contributions or scheduled IRA contributions throughout the year, you can check this off your list since you know that you have a process in place that will pay off in the future.
Once you have your Emergency Bucket filled and your Retirement Bucket growing in a systematized way, then you can begin to contribute to the final bucket: the Intermediate-Term Bucket. While the first two buckets are more integral to financial stability, this final bucket is meant to allow people to enjoy their lives without feeling guilty about spending on specific experiences or items. The Intermediate-Term Bucket, also known as the Lifestyle Bucket, is where you can focus on discretionary spending. Discretionary spending would include things like vacations, a new car, or other big-ticket purchases that you want but don’t necessarily need. It is important to set goals for yourself financially, and the Lifestyle Bucket can be viewed as the reward for meeting both your short-term and long-term goals through the previous two buckets. It is important to note that the size of each bucket will vary by person, as everyone’s financial situation is unique. However, by following the Three Buckets of Money method, you can create a clear and manageable budget that helps you prepare for emergencies, save for your future, and enjoy your life.
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