The Three Buckets Principle

Windus Fernandez Brinkkord, AIF®, CEPA

March 6, 2019

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The world of finance is tricky to navigate. With so many options available for your investments, it can seem complicated and daunting when trying to plan for your financial future.

The three buckets principle is a way of simplifying the complex and is suitable for people with substantial savings as well as people who are just starting out. Whether you’re well established in your career or fresh out of college, setting up your three buckets should be a priority.

How does it work?

The three buckets are:

Bucket 1: Emergency Funds
Bucket 2: The Goal Bucket
Bucket 3: Retirement Bucket

Bucket 1 – Emergency funds

Expect the unexpected and make sure you’ve planned financially for it.

Unanticipated costs can be devastating financially. Getting laid off work, writing your car off or escalating medical costs, for example, can set you on the financial back foot for many years.

Bucket number 1 creates a buffer of cash that is only to be used for such emergencies. By having this bucket available, it means that should the need arise you won't be dipping into other savings or going into debt to cover the cost.

How much to save in your emergency fund bucket

Aim to have 3-6 months’ worth of living expenses here. Add up all your monthly costs, such as mortgage, bills, transport costs, and groceries, and that will give you the total to aim for.

Bucket 2 – The goal bucket

This bucket is for your short to mid-term financial goals. Savings for your kid's college, a down payment on a house, or even saving for a vacation can go in this bucket.

How much to save in your goal bucket

This is effectively disposable income so anything left over after you’ve attended to your monthly outgoings and buckets 1 and 3 can be added to bucket number 2.

If you've managed to fill bucket 1 already, you can use that cash to start filling bucket 2.

Bucket 3 – Retirement bucket

It's never too early to start saving for retirement, so you should aim to have this bucket set up as soon as you possibly can, ideally, as soon as you enter the workforce.

How much to save in your retirement bucket?

Aim to save 15-20% of your gross income for retirement. If your company offers a 401(k) plan, deposit part of your bucket 3 money there. If you don't have access to a 401(k) plan, consider a Roth or traditional IRA to maximize your investment.

Bucket 3 is made for investing as you want to maximize your returns for your golden years.

These three buckets will help you successfully save for your future. It's a good idea to attend to buckets 1 and 3 first. Once you have them filling nicely, you can look to start filling bucket number 2.

This simple strategy is easy to follow yet priceless for effective financial planning. If you haven’t got yours set up yet, make it a priority to do so.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Scammers, posing as customer service representatives, will call and keep the victim on the phone for multiple hours to “resolve” a fraud issue.
The scammer urges quick action to prevent alleged hackers from draining the victim’s account.
The victim is asked for sensitive information like login credentials and verification answers.
The scammer logs in to the victim’s account to initiate unauthorized payments, bypassing security restrictions via a direct call to the real Fraud Support, all while the true customer is on hold.

Quick Tips

Check your account activity frequently and monitor for suspicious transactions.
When asked for information that seems unusual, hang up and call the phone number on the back of your bank card or account statement.
Read text and email communications fully and pause before responding.
Remember that banks and credit card companies will never ask you for your password or your card/account number over the phone.

Family & Relationships Advice

How to Teach Your Kids About Money

By Trilogy Financial

November 2, 2017

The day you become a parent is a day of overwhelming emotions. You may experience joy at the sight of your precious child, relief that he or she made it out of the womb, and for many of you, fear and anxiety because you somehow have to turn that seven-pound baby into an independent, responsible, and successful adult.

As parents, there are so many things we have to teach our children, beginning with the basics of how to eat and share toys to more complicated lessons such as making decisions and getting along with others. As a society, we are excelling in some areas of parenting, but falling behind in others. In a recent National Financial Capabilities Study, only 24 percent of Millennials (age 23-35) were able to answer the first three financial literacy questions correctly, and a mere 8 percent answered them all correctly.[1]

Most parents agree that we need to do a better job teaching our kids about money. Last year, T Rowe Price reported that 80 percent of parents didn’t think schools were doing enough to teach kids about financial matters.[2]However, parents cannot abdicate all responsibility to the schools. Raising children and teaching them to navigate the world is first and foremost a parent’s responsibility.

Set A Good Financial Example

The first step in teaching your kids about finances is modeling what you want them to learn. Few parents would disagree with this concept. The same T Rowe Price study mentioned above found that 69 percent of parents are very/extremely concerned about setting a good financial example for their kids. The vast majority, eight out of ten, feel that they are setting a good financial example, but two-thirds also admit to doing things that wouldn’t qualify as setting a good example.

An enormous 40 percent admitted that when it comes to talking to their kids about finances, it’s “Do as I say, not as I do.” Anyone who has raised kids knows that isn’t enough. My clients tell me they are very concerned about setting a good example for their children. The first step in teaching your kids about money is simple: Show them.

Talk About Finances

Sometimes a silent model isn’t quite enough, and some areas of personal finance aren’t very visible. That is why it is imperative to talk to your kids about finances. But talking about money may be a long-standing cultural taboo. Often this reluctance to discuss financial matters spills over into the home as well.

Forty-nine percent of the parents in the T Rowe Price study said they rarely or never discuss family finances with their children. Eighteen percent admitted to being very/extremely reluctant to discuss financial matters with their kids and 72 percent of parents experience at least some reluctance to having such a discussion. But how are kids going to learn about money if you avoid talking to them about it? Some topics require more in-depth discussion and openness and finances are one of them.

Get Your Kids Involved

If you want financial understanding to actually sink in, you need to get your kids involved. Learning theory and research have consistently shown that the more active a learning experience is, the greater the learning gains and retention.[3] Most people have to do something to truly learn it.

How does this work with kids? Here are some ways I’ve put this into practice with my daughter: Even though she is young, I have taught her the difference between a penny, nickel, dime and quarter. Beyond just teaching the values of the coins, I then show her how to earn money by completing basic, age-appropriate chores such as making her bed and folding her clothes. As her coins start adding up, she has the opportunity to buy a toy or to save her money and earn interest (a penny for every dollar). Just as any adult, she loves the idea of making money for no extra work, so she often chooses the savings option!

At this point, I take a step back and let my daughter make her own financial decisions (and sometimes mistakes) so that she can learn from them. She and I have different values and I’ve learned that I need to let her be independent and respect her choices. On one occasion, she decided to impulsively purchase a My Little Pony beanie baby that I thought would be a waste of money. Rather than refusing to buy the toy for her, I took a step back and allowed her to buy it with her own money. Sometimes I am surprised in the process, as she still plays with this toy three months later!

Imparting financial wisdom to your kids is a challenging process that takes years. So, if you don’t feel like you’re doing an adequate job of teaching your kids about money, you’re not alone. Even if you are doing a good job, you probably agree with the 77 percent of the T Rowe Price survey parents who said that they wished there were more resources available to help them teach their kids about financial matters.

I believe that every child can learn critical financial lessons at a young age that will set them up for future success. I want to provide you with the tools to help you on this journey. To set up a meeting, call my office at (949) 221-8105 x 2128, or email me at mike.loo@trilogyfs.com.

[1] http://gflec.org/wp-content/uploads/2015/01/a738b9_b453bb8368e248f1bc546bb257ad0d2e.pdf

[2] https://corporate.troweprice.com/Money-Confident-Kids/images/emk/2015-PKM-Report-2015-FINAL.pdf

[3] http://www.joe.org/joe/1994august/a6.php