As a society, we tend to overcomplicate things. If there is one thing we especially like to overcomplicate, it is our finances. However, you can simplify the big picture of your finances and the various categories by considering your financial picture as “buckets” of money.

The bucket analogy attempts to keep things simple, and almost everyone immediately understands it. Let’s take a look at how bucketing works:

Imagine your first bucket is your cash/emergency fund. No matter what, cash is king, and cash is comfort. Plenty of textbook answers exist as to how much money a person should have in cash and how easily they should be able to access it; however, in our experience, the true answer is the number that helps you sleep at night. Turbulent times often cause your “comfort number” to increase. Whatever the case, you cannot put a price on peace of mind, so the cash bucket is crucial. It’s your safety net, your security blanket, the bucket that helps ensure you are always prepared for the unexpected.

Next is the retirement bucket. This bucket is familiar to many of us – a 401(k), an IRA, or a Roth IRA. You are putting money here to benefit your “future you,” so ideally, you won’t touch it until you retire. Although various tax incentives and possible employer matching may affect how you fill it, the retirement bucket’s primary financial purpose is to be there when you become financially independent and no longer need to work unless you want to.

Another often-overlooked bucket can be extremely important if you structure it correctly. Many will instinctively put money in the bank because that seems logical. Others will contribute to retirement accounts because these plans are often available through their employers and have tax benefits. But this bucket, which consists of your investment dollars outside your retirement account, is a critical piece of the personal financial puzzle. If the first bucket is for now and the second is for down the road, this “middle” bucket is for everything in between. It’s your financial freedom bucket that allows you to make choices and investments that align with your personal goals and aspirations.

Once you have an emergency fund with your comfort level of cash, you can then invest within the limits of your personal risk tolerance for risk and return. While the main idea of this middle bucket is accumulation, you are also creating a portion of your net worth that you can access at any point without penalty. With this money, you can cover more considerable expenses (new car or big vacation) and make deposits to refill this bucket over time – “pay yourself back,” if you will. The middle bucket is an incredible tool, enabling you to save for life events while also allowing your money to work for you in between those events.

Three buckets. Simple, right? Ultimately, your goal should be to contribute to each of these buckets consistently. You may notice that these buckets have spigots. The point of accumulating in these buckets is not for it to remain there but to spend and enjoy your life! You can seek advice on how to distribute them based on your situation and time in your life. Need help deciding which bucket to fill first? Reach out to Savant Wealth Management. Remember, financial planning aims not just to accumulate wealth but to live a fulfilling and enjoyable life.

Author Taylor H. Brown Financial Advisor

Taylor has been involved in the financial services industry since 2014 and especially enjoys working with physicians and business professionals.

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