Only 3 days left in this program! Thank you for being here and we hope your financial life is on the right track. Today we are talking about your money buckets, let’s jump in!
The Three Buckets
There are three financial buckets we all have: the short-term bucket, mid-term bucket, and your long-term bucket. We’ll go through each of the buckets, what should be included in them, and how you should prioritize funding them. We’ll start with prioritizing, notice the order these are listed:
What is the most difficult financial challenge that everyone faces in their financial life? RETIREMENT. It’s the only answer. Yes, there are absolutely many other types of financial difficulties we face but retirement is a three decade long problem we’re all facing. Here’s how to fill your retirement bucket:
- Start with a 12-15% contribution per-paycheck as soon as you can
- Your goal is to max it out over the course of your career (the current max is around $19,000 per year)
Yes, you read that goal correctly. You might be starting out at 4% with a 4% match. If so, it’s okay, but you have to start ramping up. We aren’t in normal circumstances but as soon as we return to them this is your goal. Retirement is coming, doesn’t matter how old you are. This bucket is listed first because it has to be your #1 priority. It’s further away than your short-term needs but the need is so much greater you need to give yourself time to make it happen.
Your next priority is your short-term bucket, otherwise known as your emergency fund. An emergency fund is meant for those completely unexpected life events like getting laid off, blowing a tire, and/or having a medical emergency. The total you should save into your emergency fund is a personal calculation. It should be the total of three-months worth of expenses for your household. Though typically it would be about 80% of your total spending in those three months. You’re calculating your hard expenses like mortgage/rent, utilities, baseline food costs, car payments, student loan payment, etc. If you lose your job you will be cutting as many expenses as possible, your emergency fund should reflect this. Ideally, based on our budget guidelines, you’re already using about 10% of your take-home pay to either pay off debt or fill up your savings. The key features of your short-term bucket/emergency fund are:
- The total is the equivalent of 3-months of expenses (no more)
- No risk (this is not investing money, this should be in a low-risk savings account)
Arguably, in our current economic climate you may want to build up your emergency funds beyond 3 months expenses, but that is up to your financial reality. In normal conditions, this fund should be capped at 3 months expenses.
This is your wealth bucket and it’s your last priority. Healthy wealth can only be built on a solid financial foundation of retirement-preparedness and short-term stability. Once you’ve ramped up your retirement savings and your emergency fund is completed you have given yourself the ability to be flexible and take some risk.
Some options for this money are investing in real estate, the stock market, kids’ college education, weddings for adult children, traveling, retiring early, etc.
Often your long and short buckets are being prioritized at the same time. For example, you could be contributing 10% of your gross income to retirement through a 401k and have 10% of your take-home pay auto-deducted into a savings account. Once your emergency fund is full you could increase your retirement contributions steadily. To be clear, these goals can take years to meet, especially in our current reality.
If you are looking for more personalized guidance don’t forget that a Hey Money expert is always ready and waiting to help you sort out this mess. Use code ‘cheese’ to get a 10% discount on a monthly subscription just for being a part of the 30 day recession-proof your life program. Stay strong!
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