How Buckets fit into Your Financial Plan
As a CERTIFIED FINANCIAL PLANNER™ and financial coach I'm here to tell you that saving is one of the best money moves you can make! You're saving for your future, for your goals, and for your loved ones by putting aside a small amount of your income for the future! Many of us save for a variety of things instead of putting our entire savings towards a singular goal. If you're like many of us and saving for multiple purposes, you're going to find that the lines between money saved for which goal begins to blur until they're gone entirely, and you're left with one bucket ofsavings.
Suppose you're keeping all of your saved money in one place. In that case, you're going to fit into one of the following camps: Constantly adding your monetary goals together to check your progress. Keeping a pen and paper ledger with scribbles, cross-outs, and stray mathematical marks in the margins, or losing track of each goal, and just hoping that you're meeting it.
None of these approaches are ideal, and a quick look at each reveals why. Your goals change over time, which makes continuously adding and checking overall savings difficult. Keeping a pen and paper ledger is time consuming and messy, which leads to a frazzled mess. Losing track of your individual goals can take some of the gusto out of saving; part of what keeps you saving is knowing that you're slowly but surely meeting goals and deadlines you've set for yourself. Not to mention, all three of those methods/camps leave a lot of room for human error, and it can be extremely disheartening to think you're doing great only to find out down the line you're underperforming in one area or another.
Buckets are Useful Tools!
Luckily for all of us, there is a way to avoid or overcome the congealed mess that is unorganized savings! Buckets are pools of money, possibly in different accounts, that are saved for specific purposes! Buckets are great for holding, separating, and keeping your cash orderly! They just also happen to solve all of the problems I've discussed above (funny how that works, right?).
Buckets can be used in your financial plan!
Creating and sticking to a financial plan isn't always easy, but that's why CERTIFIED FINANCIAL PLANNERs™, like myself, exist! We're here to help you take a serious look at your income, expenses, and goals and put your money where your mouth is! Buckets are just one of the many tools that you and your financial coach can use to set and meet financial goals for yourself and your loved ones!
Create Buckets to Save for Expenses
If you know that you have specific bills or expenses coming up, it only makes sense to plan and save for them! Creating a bucket for planned expenses is one way to stay organized and on top of your bills, so they don't mess up your wallet/purse! Let's face it, we all learned from "Dear Liza and Henry" about the importance of fixing the hole in the bucket, and various methods to do so.
All jokes aside, it's incredibly important to plan for expenses, especially when you know they're coming. If you don't set a schedule, put money aside, and know what's coming up, you're leaving yourself (and your money) open to being taken by surprise. Being caught off-guard by bills isn't great and can lead you down the path of paying bills with credit cards and putting yourself into debt by taking out personal loans.
Using Buckets to Budget for Tax Season
Like your bills and expenses, taxes are something you know are coming, and you should plan for them! Whether you're an employee, self-employed, a freelancer, an investor, or anything else - taxes are sure to come! If you find yourself paying taxes instead of getting a tax refund, you should plan for those state and federal taxes that are right around the corner. Creating a bucket to set aside money for your taxes is a smart move, especially if you're self-employed. If you're unsure about your taxes, if you're going to have to pay any, or are unsure how much you'll owe at the end of the year, contacting a tax planner or accountant is an excellent step in the right direction!
Buckets are Great for Short Term Goals
What are short term goals? While some people might define a short-term goal as something that can be achieved in a week, others might describe it as something that takes less than a year to do. It may seem counter-intuitive, but both of those neatly fit into a broader definition of short-term goals.
In personal finance, a short-term goal can be any financial goal that takes a relatively short amount of time to achieve. What is relatively short? Well, that's a little more ambiguous and depends on you, your other goals, and your mindset. (As an example.. my toddler would vehemently tell you short term is five minutes!) So, what are some examples of things that can be considered short term goals? According to PocketSense, examples of short term goals include, but aren't limited to:
- Paying off a Debt
- Saving for a Small to Medium Purchase
- Creating an Emergency Fund
- Setting Small Short Term Goals to achieve Long Term Goals
Our first example of a short term goal (that you could use buckets to achieve) is paying off debt. This could be credit card debt, a personal loan, person to person debt, as long as it won't take an extremely long time to pay off. You could also save for purchases, create an emergency fund, or set small short term goals to work your way towards a long term goal. All of these are great examples of short term goals, and you could use buckets to work towards any of them! I'm going to talk a little bit more about emergency funds later on; stay tuned!
You may be thinking, "whoa, those seem pretty large for short term goals." If you believe that, you're absolutely right! Just because a goal is short term doesn't necessarily make it any less of a challenge; it only means that it's over a shorter time period. Nevertheless, you should be proud of yourself when you accomplish these goals (using buckets).
Buckets Are Also Useful for Long Term Goals
Long Term Goals are (seemingly) more intuitive than short term goals. There isn't much mincing or mixing of words when talking about long term goals; they're just goals that it takes a relatively long amount of time to achieve. Here are a few examples of long term goals from Money Crashers:
- Saving for Retirement
- Buying a Home
- Buying an Island (Hey... A girl can dream)
- Starting a Business
These are great long term goals to have, and they're best achieved using buckets! If you're saving for retirement in a retirement account, you're already using a form of a bucket by keeping your money separated. Still, suppose you're looking to buy a home outright or make a sizeable down payment. In that case, a bucket is a fantastic option to keep that saved money wholly separated from other saved money that may be occasionally tapped for other bills or expenses.
If you want to start a business, having a bucket to put money aside is excellent while you're in the planning stages. However, once you get closer to launching your business, creating separate business accounts to handle all of your businesses' income and expenses is another way of using buckets to keep your money separated.
Using Buckets when Investing
If you're an investor or thinking about becoming an investor, you may also find buckets useful!
Keeping all of your invested money in one stock or bond, or company can be extremely risky. You've probably heard the old saying, "don't put all your eggs in one basket." Well, that's because any basket is at risk of falling over and spilling all of its eggs. Diversification is a strategy used by financiers to invest different money pools in different companies, stocks, and bonds. This ensures that if one business goes under, you won't immediately lose all of your money. You may take an uncomfortable hit, but you'll still have plenty of other invested capital in a variety of companies and industries. Diversification is yet another example of using buckets to keep your (invested) money separate.
Should Buckets be Used For Multiple Savings Accounts?
If there's any confusion in this area, it'll be good to clear it up. Nothing is stopping you from having multiple savings accounts. Some banks or financial institutions may limit you to a single account, but there are plenty of others that would be happy to allow you to open as many (funded) savings accounts as you'd like!
Multiple Savings Accounts = Multiple Buckets
Here's a plus to having multiple savings accounts, you can easily have (very) separate buckets! You could open up new savings accounts for each bucket. Want a "bills" bucket? Boom, savings account. Want a "car down payment" bucket? Boom, savings account. The bottom line is that savings accounts are safe places to keep your money and the more you have, the more hands on and visual you can be with each savings account/bucket.
Why Emergency Funds Should be in their own bucket
Emergency funds are another example of why you should be using buckets. Everyone sort of knows that they should have an emergency fund, but it's easy to shovel your emergency fund off onto your general savings account. While it may feel like you're being responsible and saving, this is actually a bad move. If you're using a general savings account and calling it your emergency fund, you may be putting money in for car payments, mortgage payments, insurance, or whatever else that inflates your balance and makes you think you have more money put back in the case of an emergency than you actually do.
Just think, if you were to have an emergency and take money out of your savings account to cover for it, would you come up short on rent or another necessary expense? Alternatively, if you were to take out all of the money for expenses, would what's left be able to cover an emergency? If you're using a general savings account as a cure-all instead of a bucket system, you're running the risk of coming up short. What would happen if you weren't able to pay for the emergency or a bill? Most likely, you'd be forced to load up your credit card or take out a personal/emergency loan. With credit card interest, you'd be racking up more than you would if you were to pool your money in buckets and could pay those expenses outright. With a personal loan, you'd be paying an arm and a leg for extremely high interest rates.
Buckets on Buckets on Buckets
Buckets are kind of amazing, and they're a great option if you're saving for any reason. They help by keeping your money separated, which is more important than most people realize. Keeping that money saved and separated gives you excellent visualization of how much money you have to put towards each bucket and leaves human error entirely out of the equation. Buckets are also helpful to anyone struggling to get out of debt or pay something off.
Keep your money separated in buckets so you can keep your credit card in your pocket. Knowing where your money is going eliminates the guesswork, which will inevitably lead you away from reaching for your credit card and thinking, "I'll figure it out later." Later is now, get in touch with a certified financial planner who will help you create and stick to a plan that prioritizes your future instead of relying on generalized savings accounts to get you by.
Kicking the Bucket is Part of Your Financial Plan
Let's face it... at some point in our life we all "kick the bucket". The fact of the matter is nature always wins, and here is no way around it. Planning for death is never a fun topic to think about, but it is an important part of your financial plan. Protecting our loved ones and transferring buckets after death requires planning in advance. Visit my blog post on Death and Your Estate to read about topics to consider!
A CERTIFIED FINANCIAL PLANNER™ Can Help You Create a Plan For Your Buckets
Are you interested in creating buckets of your own? If you need guidance to save for long-term or short-term goals, or if you want to pay off a debt, please call or email to schedule an appointment with me. I'll work with you to create a financial plan that's optimized for you.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.