Three Buckets for Savings & Investments

Three Buckets for Savings & Investments

Here at MainStreet, we have been using this concept for a while.

It helps to set a specific purpose to track what your goals are and what financial resources (income, savings & investments) help you get there.

3 Buckets Matrix Revised 7.6.18

Let’s talk about each of these buckets. There are imaginary buckets. They help us visualize our short-term goals, mid-term goals and long-term goals, and how our savings and investments will help achieve them.

Bucket #1: Short-term (up to 3 years)

Think about what is going to take place in the next three years and what are you going to need money for.
Emergency reserves are included here. Part of this bucket is going to be allocated for that. What if you were buying a car next year? Then your savings are going to be allocated in this bucket.

Type of investments: CDs, Money Markets, Online Savings Accounts. Basically no volatility and exposure to the market.

If you are in the distribution phase, this becomes your “withdrawal bucket”. You may need to have three years worth of living expenses stashed aside.

Bucket # 2: Mid-term (3 to 7 years out)

Think about what’s going to take place in the next five years that you going to need money for.  Let’s say you were planning to buy a house in a few years and you’re saving for a down payment. This would be the bucket where that money is accounted for.

Type of investments:  Bond funds, individual bonds, CDs, Preferred stock, balanced funds. There is some volatility in this pocket.

Bucket #3: Long-term (7+ years timeline)

Life goes on. And we need to plan for it. The most typical goal is retirement. And because time is your friend, you can take more risk with the type of money you’re saving in bucket #3.

Type of Investments: Stocks bonds, mutual funds, index funds, hard assets, real estate, business assets.

When we are thinking about allocation, we use these buckets to help us think about the timeline for accepting the appropriate risk. For example, bucket 3 should have the most risk exposure. That could be in the form of stocks. The example I gave earlier about planning for retirement, that’s the most typical long-term goals for clients. Therefore your retirement accounts need to have exposure to stocks.

In the chart above you see a breakdown of kind of allocation, (stocks to bonds) each bucket gets. For example, our typical Starting out client in their 20s will have an overall allocation of 90% stocks/10% bonds; 100% stocks allocation in Bucket #3 and 70% stocks/30% bonds in bucket #2.

Once you understand and adopt this concept, it becomes really easy for you not to worry about what the stock market is doing, how you are tracking against savings goals, and where you need to be saving or taking distributions from.

Anna Sergunina
Anna Sergunina

I'm Anna Sergunina, CFP®, President & CEO at MainStreet Financial Planning, Inc. My passion lies in serving others through financial planning, helping clients achieve their dreams like buying a home, saving for education, or retiring early. With over two decades in the industry and a CFP designation since 2009, I'm dedicated to excellence and continuous growth. Beyond work, I cherish moments with my son Liam, prioritize self-care, and engage in content creation for my Money Boss Parent Podcast and Money Library blog.

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