Picking up where we left off last week for #FinancialFitness2018, let’s talk more about the Bucket Strategy.
You’ve created your budget and stuck to it, and now you have income left over at the end of the month. What do you do with it? This answer is different for everyone, depending on your age and financial situation, but the strategy we’ll be discussing works for everyone.
The Bucket Strategy takes your savings and breaks it up into different time horizons. In its simplest form, you have short term, mid-term and long term buckets. The short term is your emergency savings, the mid term is money that you’ll need access to in the future but won’t need immediately, and the long term is your retirement.
For many of my clients I add a fourth bucket; credit card debt. Credit card debt is something affecting people across the country, and the Bucket Strategy provides an option for resolving it.
So, how does it work?
A lot of people think that before they start saving for their retirement, they should make sure that they have 6 months of income saved in case of an emergency. Others feel that they should pay off all of their credit card debt, before they start saving anything for the future. While these are both logical conclusions, there’s a better way.
Let’s say you have $200 left at the end of every month. Instead of taking all of that $200 and putting it into one “bucket”, you break it up. For example, $60 could go towards credit card debt, $85 could go towards emergency savings, $30 would go in the mid term bucket and $25 is put into a retirement account.
When you break it up this way, you’re putting yourself in the best position to meet all of your goals. You definitely need to be paying off that credit card debt, but you also need liquidity in the case of an emergency. Saving for retirement is incredibly important, because that is something we’re heading towards, no matter what, and you need to have money saved up for when you get there.
This is how the Bucket Strategy works in theory! In the next post, I’ll explain how to implement it.