Saving money can be a challenge for even the most financially savvy. It takes willpower, sacrifice, determination...and a plan. A lot of people have a savings account, but is that really enough to meet your needs and make your future secure?
Often when sitting down with people to discuss savings we make a “bucket list.” This is a list of 5-6 savings buckets. Each bucket serves a different purpose, and allows families to plan - and save - more effectively.
The buckets are:
Save-to-Spend
Emergency Fund
Long Term Savings
Retirement
Health Savings Account
College Fund*
Bucket 1 - Save-to-Spend: This bucket is for the money you know you're going to need in the near future, for things like Christmas, birthdays, vacations, repairs/replacements, and small emergencies. $1,000-$5,000 may accomplish these immediate needs.
Bucket 2 - Emergency Fund: This bucket is for all those unexpected accidents or disasters. Aim for three to six months income - at a minimum. Depending on your income $30,000-$60,000 might work.
Bucket 3 - Long Term Savings: This bucket is for collecting money for some of the bigger projects you plan for, things like remodeling a bathroom, new HVAC system, or replacing a car. Paying cash for these large ticket items is the way to go. Aim for $10,000-$40,000.
Bucket 4 - Retirement: This bucket is for the next biggest change in your life - retirement, not working again. Actually, retirement may have a few different stages: there are the go-go years, the slow-go years, and the no-go years. Each of these time periods may consume different amounts of your retirement resources.
Bucket 5 - Health Savings Account: Save as much as you can for future healthcare expenses. This account is very valuable, due to the tax advantages.
*Bucket 6 - College Fund: Not everyone needs to have this bucket, but if this is something you want to save for, then certainly it should be included in your list.
If the worst happens and you need money now, if you have properly filled your buckets, you have multiple reserves to pull from. You would start by using the money from your 2nd bucket - your emergency fund. Then, if you needed more you would pull from your 3rd bucket - your long term savings fund, followed by your 1st bucket - your save-to-spend bucket. If things are still uncertain you could then pull from your 5th bucket - your HSA. Only under the worst scenario should you pull from your 4th bucket - your retirement fund.
It's important to know that each bucket is actually a separate account. Don’t think that compiling the funds will accomplish the same thing as each bucket would. When spending it’s often emotional and if the money is there, without a clear demarcation it will get spent on the wrong things. Remember it takes mountains of self-discipline to save money, but not much at all to spend it!!
This plan keeps your future secure while still allowing you to meet your current needs.
“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” - Edmund Burke