Dave Adams, Senior Wealth Advisor out of our Nashville, TN branch, recently joined Summit Wealth Group after operating Adams Investment Strategies for many years. Dave was on our Reach Your Summit podcast a few weeks back to discuss the three-bucket approach he has used with his clients for many years. This episode can be found here.
Today, we wanted to break down this concept for our blog readers as well.
The three-bucket approach is a goals-based financial planning technique that aims to simplify the process for the typical American family.
Essentially the way it works is to first consider this: all savings accounts aren’t created equal. When it comes to saving money, you should prioritize your savings into the three following buckets:
- Unplanned for expenses
- Goals and dreams
Bucket 1: Unplanned For Expenses
Before anything else, you must have a bucket for unplanned expenses. Unplanned expenses would include anything that could happen in the first year that is out of your control. People that get into trouble with their finances are the ones who live without a plan for the unexpected.
So how much should you put in bucket 1? This might be a bit different for each person but think about areas of vulnerability for you. Replacing home appliances, car repairs, your health plan deductible, dental emergencies, your homeowner’s insurance policy deductible -- these are all examples of what could be an expense paid out of bucket 1.
Remember, the goal is to think of anything unexpected that could happen in the next year which you weren’t planning for, and you are placing enough money in that bucket to cover those things. Perhaps $3k-$5k is a good place to start. Also, keep in mind it is not likely for a lot of unexpected things to happen at once, so you should have some time to replenish this bucket if one or two things begin to deplete it.
Bucket 3: Retirement
We are skipping bucket two for the time being to jump to one most people are familiar with: retirement. The question of how much to save for retirement is a conversation on its own. However, as a general rule, saving 10-15% of your income during your working years can provide you with the equivalent quality of life in retirement as you had during your working years. If your employer has a 4% 401(k) match and you are contributing that 4%, then you are already up to 8%. Consider bumping that contribution up to at least 10%, closer to 15% if you can swing it.
Bucket 2: Goals and dreams
Bucket 2 is the one most people are least familiar with logistically. We all want to take a Disney vacation or buy a boat, but realistically how do you get there? That’s where the goals and dreams bucket comes in. We recommend budgeting in a separate line item for this. In other words, when you sit down at the beginning of each month to look where your paycheck will be spent, “spend” a portion of it on your goals and dreams bucket. Some people find it helpful to set up a separate checking or savings account for this so the money is out of sight out of mind.
The goals and dreams bucket is the fun bucket, it’s the one you and your spouse can discuss over dinner – and dream a little. The difference is that this dream will become a reality sooner than you think if you make it a priority.
...and that's the three-bucket approach! Have questions? Don't hesitate to reach out to one of our advisors!