What’s the most important part of your financial strategy? Creating an emergency fund? Saving and investing? Understanding what money goals you need to set for your priorities? Trick question, it’s kind of all three.
First up: let’s talk about the accounts you might use for each bucket. Each “bucket” is a category, not an account itself. You may have multiple accounts to fill each bucket, and you need at least one account to start.
Your short-term bucket includes money you need between now and the next two years. That might include your regular checking account and a separate emergency fund account, which should be three to six months of living expenses saved.
On the other end of the strategy, you have your long-term bucket which you’ll use to save for retirement or revivement. This includes your retirement accounts: IRAs, Roth IRAs, 401(k)s, and so on. You may even have a separate (non-retirement) investment account if you want to save more than the maximum in a retirement account, or if you’re planning to retire early.
That leaves us with the intermediate-term bucket, which you’ll use for mid-range goals you hope to achieve in two to ten years. A down payment for a house, paying for college, or buying a new car are common mid-range goals. A lot of us don’t spend enough time tending to this bucket, probably because the focus in the finance industry and the media is all on savings and retirement in your long-term bucket.
The first step in your bucket strategy? Create an emergency fund with at least three months of living expenses. And at the same time, if you have a 401k, start getting your matching so you can get that free money! Reaching both of these goals is important for your first step. No 401k? No problem. Focus your energy on hitting that emergency fund amount as soon as possible, especially if you have kids.
Next, you’ll want to pay some attention to the other two buckets. If you don’t have a 401k, you’ll want to start contributing to a long-term investment account. Planning on retiring traditionally around 60 to 65 years old? Begin contributing to an IRA or a Roth IRA. Hoping to buy a house within the next few years? Set aside money for your down payment. Look at your goals and budget, and decide where your money needs to go. Once you know, set up payments automatically so you don’t have to think about it. It’s just ready and waiting when the time comes.
Let’s say you’re one of those cool kids who wants to enter retirement, or revivement, at a younger age. To make that happen, you’ll want to contribute to an additional non-retirement account that doesn’t have any restrictions. Why? Without this account, you’ll have to pay penalties to dip into those retirement accounts early, when you’re ready to retire at 50 years old. And that’s no fun.
Remember that scene in Fantasia where Mickey Mouse waves his magic wand and makes all the brooms start cleaning the castle for him? Mickey found a way to work smarter, not harder. That’s how your relationship with your money should be. You’re the conductor, and you’re in charge. Make your money work for you. It takes some time to set up at first, but once you do, you’re golden.
If you want to actually get to know your numbers, join our [FREE] Know Your Numbers email series! With this week-long series, you’ll figure out your own personal bucket strategy, including how much to save in each of your “buckets.”
The opinions voices in this material are for general information only and are not intended to provide specific advance or recommendations for any individual.
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