How to Fund Life's Buckets
When it comes to investing, you have to factor in all stages of your life. We have our immediate needs, our aspirations that we are constantly working towards, and then ultimately, we have to be preparing for retirement and creating a nest egg that will support the lifestyle we want to live.
While this may seem daunting, I have found it helpful to summarize this journey into three different buckets that we all need to address:
1. Short-Term
2. Medium-Term
3. Long-Term
Short-Term: This bucket is comprised of funds that are needed within next 12-months, otherwise considered your emergency savings. This money is liquid and can be accessed at any time when needed. Think of your checking or savings account, and in some instances, a high-yield savings account can be a great tool here.
Medium-Term: Within the medium-term bucket, we are looking to address needs and goals that you are looking to achieve within the next 2-5 years. This can include purchasing real estate, planning a trip or vacation, purchasing a car, etc. Utilizing an investment account and investing your funds in the stock market is a great way to work towards these objectives.
Long-Term: Last but not least, our long-term goals. Think retirement and funding major life events 20+ years from now. This bucket would be comprised of retirement accounts such as an IRA, 401(k), 403(b), etc. This money is not readily available and, as of right now, can’t be accessed until age 59 1/2 without paying a penalty.
How to Invest in Each Bucket:
As I alluded to above, the short-term bucket is something most, if not all of us, have already addressed. If you have a checking or savings account already opened, you are addressing your short-term needs. How much you keep in these accounts is totally up to you. Some people like to have a significant amount of cash in their checking account to help them sleep at night.
Others want just enough in there to cover their expenses over the next few months and then put the rest of their money to work elsewhere. There is no ‘magic’ number, I always recommend to have an amount that feels comfortable to you.
Just ensure that if the worst case scenario happens (i.e. you lose your job, major medical expense, etc.) you have the funds readily available to help address those issues. A high-yield savings account keeps your funds liquid and readily accessible while usually generating more interest for you compared to a generic savings account.
For the medium-term, I utilize a standard investment account. Setting up an account is very straight forward and can be done at a variety of different companies: Fidelity, Charles Schwab, Robinhood, etc. My goal here is to put some cash to work and hopefully generate a return over a 2-5 year period to help me fund a particular goal or life event.
You may need to be tactical on how you invest the money here. The last thing you want to have happen is you are approaching a particular deadline, such as closing on a real estate purchase, and you have most of your funds in the stock market, heavily tilted toward equities.
If we were to experience a major dip in the markets, which happens quite frequently, then you would find yourself in a little bit of a cash crunch. So, to avoid ripping your hair out or yelling at yourself in the mirror (just me?), become a bit more conservative when you are closing in on your goal in order to protect the value of the account.
In the long-term bucket, I tend to be more aggressive. The reason being is I know I have time on my side. History has shown the longer I am invested, the better my odds of success. Especially if you have a Roth IRA, as those proceeds would be completely tax free to you after 59 1/2.
Even though retirement may seem far away for most of you, addressing this bucket early on is crucial.
In order to truly make the most out of your money, it’s all about capturing your cash flow. You must consider funding all three of these buckets consistently, no matter how small the contribution may be.
Consider setting up systematic deposits where each month you are putting some of your money into a high-yield savings account (short-term), some proceeds into an investment account (medium-term), and finally, making contributions to your 401(k) or IRA (long-term).
Consistent habits over a prolonged period of time can lead to extraordinary results. We all need to prepare for the worst but hope for the best. Create a game plan, stick to it, and watch the magic of compounding unfold.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.