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Three buckets to manage your financial life
#1
In this article we're going to use a metaphor of a well and three buckets to represent the money game we all play in life.The three buckets are labeled “spending”, “savings” and “investing.” The well represents the amount of money available to you in any given year. The spending bucket represents the money you must spend to enjoy the quality of life you want. The savings bucket represents money you absolutely can’t afford to lose. And the investing bucket represents your future wealth.

The challenge with the three buckets is to balance the amount of water (representing money) in each one. There are two problems with this challenge. The first is that the well will give you only so much water within a given time period. The second problem is that the "spending" bucket has a big hole at the bottom of it. The hole in the spending bucket indicates that water that leaves the bucket is no longer available just as money that you spend is gone. If you can manage to fill all three buckets, you have won the money game because you have achieved balance in your financial life. 
 
So can this money game be won? Yes, if you play it smart. And you can win it relatively easily if you use the ideas shared here.
 
The money ­management system that will be discussed here is quite simple. It can provide for all of your financial needs. It will allow you to live well now... and live well in retirement.  Here each of the three buckets will be described. 
  
Spending Bucket
 
Using this system, everyone should be able to live a rich life while your assets grow, so long as you are willing to work diligently and you are smart about your spending.
 
Think of the typical earning/spending/saving pattern of most people who want to retire well. 
 
During their twenties, people spend every nickel of their modest income to make ends meet. It is nearly impossible to put aside money for the future at this age.
 
Their income increases during their late twenties and thirties. However, this is when they start a family and their expenses soar — children to feed, buy a family car, and the buying the first house. In most cases, they don't save nearly as much as they thought they would.
 
Income climbs much higher in their forties and early fifties if they work hard and make good career decisions. They have more money to put aside for the future, but they are also tempted to buy nicer stuff — cars, clothes, exotic vacations, and their dream house.
 
Income plateaus or even dips in their later fifties and sixties. Often this is when they realize their retirement funds are not where they would like. They may start to invest aggressively to try to make up the difference.
 
It often happens that they realize that they don’t have enough money to retire comfortably in their late sixties. They have spent almost forty years working hard and chasing financial security, but they never managed to attain it.
 
This is the sad pattern repeated by most people. This pattern even holds for high ­income earners like doctors, lawyers, and high level executives.
 
There are two lessons to be learned from this pattern. First, it is very difficult to acquire financial security if you increase your spending every time your income increases. Second, setting unrealistic investing goals to make up for lost time means taking greater risks. And taking more risks, makes you poorer in most cases, not richer.
 
The bucket spending strategy is very simple. Discover your own, less expensive way to live a rich life. What do I mean by “rich life”? I mean a life free from financial stress, but also filled with things that give you pleasure.
 
You can be just as comfortable in a house that costs $100,000 or $200,000 as one that costs millions. A car costing $24,000 will take you where you want to go just as well as a car that costs ten times that amount. There are many ways to live a "rich life" on a modest budget. You will be able to keep more water in your spending bucket if you figure out how to live the kind of "rich life" that suites you because you will spend less. 
 
So, make smart spending decisions. Do not allow yourself to think that because you are earning more money, you should be spending more. Your future financial well being is determined by how much you save and invest, not by how much you spend.
 
This is what you can do to live your own "rich life". Figure out how much you will spend to live your own personal version of a “rich life". You might be thinking about all the things you truly enjoyed in the last year. In many cases, you will find that the things you enjoy require very little in the way of money.
 
Learn to keep the biggest wealth ­stealing expenses (house, cars, and entertainment) to a necessary minimum. Carefully avoid any expenditure that has a brand name attached to it because they consume a disproportionate amount of money.
 
Do not give mental ascent to the idea of controlling your spending and promise to get to it sometime in the future. Begin to figure this out today. If you procrastinate, you will never get it done. 

Once you have figured out the size of your spending bucket, you can begin to figure out the size of your saving and investment buckets.
 
Savings Bucket 
 
You may be thinking that saving and investing are the same things. If you distinguish between them, you will find it easier to safely attain financial security. 
 
You are setting aside some portion of your current earnings for the future with both savings and investing. However, savings and investing have a different purpose. Saving is to safeguard the money you set aside. Investing is to grow your money.
 
The money in the savings bucket should comprise two things really. One, money that I refer to as your disaster fund — the money you put aside in case of a financial disaster. And two, anything you are saving for that you will be paying for in less than 7 years.
 
What would you do if one day you found out the company that has employed you for the last twenty years has shut its doors, and the pension plan that was holding you retirement was worthless?
 
You would have to start over. You would need money to pay for your expenses while you found a new job. That’s why you need money in your savings bucket. And that money has to be absolutely safe.
 
Now imagine you called your broker to get the cash in your disaster fund and he told you its value had suddenly crashed and was now worth 10 cents on the dollar? This exact scenario happened to millions of Baby Boomers when the market crashed in 2008. The reason it happened was because these folks did not distinguish between saving and investing. They had all their money tied up in investments advertised as safe, but were actually quite risky.
 
You don’t want to take any risk with your disaster money. The primary purpose of that money is to preserve, not increase, the money you set aside. Putting it at risk, even average market risk, is too dangerous.
 
The money you have set aside for any future expenditure that is coming up relatively soon should also be kept in your saving bucket. By relatively soon, I mean, seven to ten years.
 
Why 7-10 years? This range is somewhat arbitrary but it is considered by many to be an average
business cycle. You can put money for retirement and college into investments but when they get close ... 7-10 years or closer ... move them into safer instruments so that you can be extra sure you will have enough.

If your retirement is twenty or thirty years away, you can afford to invest the retirement money in places that are safe, but not super­-safe. However, if you retire in 10 years or less, you can not take the chance of seeing your retirement fund drop by 20% to 30%, because you will not have time to let the market correct itself.

So if you plan to retire in 7-10 years and you will be drawing on your retirement savings, you want to transfer at least 7 years’ worth of your retirement fund from your investing bucket to your savings bucket. To make sure that you will be able to have the retirement life you want, you can not afford to have that money at risk.
 
As you plan for a future event (retirement, college fund, etc), you will have to assume that the interest you will be getting for those 7-10 years will be small because you will be using the only the safest vehicles. This means you will have to put more money into them than you would otherwise. 

For your savings bucket, your money should only be in super-­safe investments. These are investments that are highly unlikely to go down in value in the next ten years. Given our current economy there are only a hand full of investments that might provide this safety: cash, gold coins, quality municipal bonds, and well-­bought rental real estate.  Another asset type called a "770 Account" may be stable enough to fit into this list (click here to read more). One simplistic approach would be to decide which of these vehicles you will use and then divide your savings bucket funds evenly among them. For example, if you use four of them each would get 25%.


Investing Bucket
 
The purpose of your investing bucket is to grow your money. This is the bucket you will use to fund all future, long ­term expenditures. "Long ­term” means more than ten years.
 
If you are young, you may use this bucket to set aside money for your children’s college education. But the most common reason of these funds will be for your retirement. When you look at investment returns from a long ­range perspective, even a few percentage points can make a huge difference.
 
Discussing specific strategies for your investments is beyond the scope of this article. However, it is appropriate to set your expectations. The returns you expect for your long term investing should be no more than 10-­15%. This might seem small to people who want to double or triple their money in the market every year, but those kinds of investors usually end up broke. And making 10-15% on your money over the long term will give you terrific results.
 
Your Well 
 
If your income is not sufficient to fill all three buckets, you have only two choices: You must increase the flow from the well you have, and/or you must dig some new wells.
 
You can increase the income from your primary well (your job) by becoming a more valuable employee. You may also want to create other streams of income.

One option is to start a side business. One kind of side business with a low start up cost is in entering the multi-level marketing segment. If you choose this route, pick a product you really believe in. Other ideas would be to turn what you are passionate about into a business.
 
Another approach would be to invest in rental property. After you have paid down the mortgage, the rental will become its own well, pumping out money to you every year thereafter.
 
If you decide to start your own business, find some good books to educate yourself because there will be a lot to learn.
 
The major point that needs to be made is if the income you are earning is insufficient to achieve your financial security goals, you should not try to get there by taking on more risk with your stocks. Instead, figure out ways to create more income.
 
That's it. The concepts are simple and they can work for you if you use them. So, spend the time required to figure out your own approach to “living rich” now and in the future. Make your spending bucket big enough to allow you to enjoy your life now, but small enough to enable you to fill up your saving and investing buckets too.


 
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