I recently came into a chunk of change, and wanted to do something smart and adult, like invest it or put it into a money market or brokerage account. But until about 3 weeks ago, I had no idea what any of those things meant. So through a family referral, I met with a financial advisor. I literally walked in with my laptop, sat down and said, “I have a lot of things and need you to tell me what they are and what to do with them. I have company stock, old and current 401(k)s, bonds and some cash. Help my pitiful self.” And he did.
The three bucket system I learned from my financial advisor:
There was lots of picture drawing, acronym explaining, slow talking, caffeine drinking and acronym re-explaining. At the end of the meeting, I walked away with one important nugget of financial advice that makes total sense and I will not soon forget.
My money needs to be in three buckets.
Bucket #1: “Spending money”. This bucket should contain 6-24 months of income in accessible cash for emergencies or unexpected purchases. The point of this bucket is to have the money before you need it. This can be kept in a typical savings or money market account, but I chose Capital One 360 (formally ING Direct) because it has a higher interest rate than my brick and mortar bank savings account, Bank of America.
Bucket #2: “Saving money”. This bucket is for three to 10 years from now. This is the money you will need to pay for a future down payment on your house or a new car. This will be in the form of savings bonds or stocks. You aren’t looking to make big profits on this bucket, just protect the value and see mild growth for when you need it.
Bucket #3: “Investing money”. This is your plan-for-the-future and retirement bucket. You want to invest in long term, high-quality, dividend-paying stocks and bonds that increase in value over time. This includes your 401(k), Roth IRA and possibly company stocks. You shouldn’t expect to touch this money until you are old and gray.
The three bucket approach is not a new one to the financial world, but it was new to me and helped make sense of what is an otherwise intimidating subject. With support, advice and guidance from my financial advisor, I now have a clear plan for spending or saving my unexpected cash gain.