It’s called the “bucket saving strategy” because when it comes to strategizing access to money and savings, it’s easy to use. (Besides, it’s much easier to say than the “pail strategy”). If you’re having difficulty setting money aside for short-term needs or goals and find yourself dipping into retirement savings to meet a financial need, assigning money to compartments or buckets could probably help.
Let’s start with three (imaginary) buckets and label them as follows:
Each bucket is time-sensitive. The now bucket contains funds that you’ll need within the next 12-24 months. Think of the now bucket as your access to emergency cash. What would you do if you lost your job or needed major car repairs, for example? This is the bucket you’d want to pull funds from when you have an immediate need.
The soon bucket is where you would hold money that you will need over the next 3-5 years. Items such as a new car, a roof, or even a new home would be paid for out of funds set aside in the soon bucket.
The later bucket is typically reserved for building wealth or saving for retirement. It could also be used to set money aside to start your own business.
Examples:
Note that the common denominator across any bucket strategy is time. Each bucket represents a period of time that is unique to you and your anticipated financial needs provided that the length of time “reasonably” fits within the timeframes suggested and that they do not overlap. Here are a few steps to follow to help make the bucket saving strategy work for you.
Use the financial planning goals worksheet to list what you want to save financially. Is it a family vacation, a house remodel, or retirement? Write down each goal and when you would like to achieve it. Indicate the total amount needed and what you can reasonably set aside per month in savings toward your goal.
If you have a spouse or partner, be sure to talk openly about your respective goals and what you both choose to accomplish, together. The goal planning worksheet is a great communication tool for starting a conversation between both of you. Once you agree on your goals, commit to setting funds aside in the respective buckets and track your progress.
What if you and your spouse or partner keep your finances separate but contribute equally to shared expenses? You may wish to add a fourth bucket and call it “ours.” The “ours” bucket is what you both contribute to and pull from to pay for joint expenses. Many blended families who do not pool their resources often contribute to an “ours” bucket for expenses such as food, shelter, and utilities.
Besides time, the other variable to consider is how much you will maintain in each bucket. While the now bucket, set aside for emergency purposes, will typically have an upper limit, the later bucket will not.
One of the best parts of the bucket saving strategy is that once you reach the upper limit of your now bucket, you can allocate excess funds to the soon bucket and, eventually, all of your excess savings to the later bucket. In other words, your savings strategy is executed for you! No more guessing how much you should set aside for emergencies or expenses anticipated 12-24 months from now. Once the funds are set aside, you can prioritize your savings toward other goals.
The term bucket is used to describe the time and amount of savings you plan to set aside to reach your financial goals and the fact that you are saving the dollars in an account held at a financial institution.
Be sure to speak with a financial professional about the proper account registration that is right for you, as well as the appropriate investment choices for the funds being set aside in each bucket (account). Typically, investments for your now bucket include money market funds, cash, and CDs (certificates of deposits). Investments in your soon bucket may include risk assets (stocks, ETFs, mutual funds, for example), but more often, those risk assets will be reserved for your later bucket since you will not likely need them for some time. Again, speak with an investment professional for fundamental guidance and investment selections that are in your best interest.
A plan must continually be monitored and recalibrated to remain helpful and relevant. Pull out your goals worksheet and revisit your financial needs personally or with your partner if you have one. Check your bucket balances and whether they are set at the proper limits, as well as the underlying investments within them. Interest rates do change over time! Make sure you are getting the most for your cash savings as possible and that the amounts you have set aside are fully liquid and available for your needs, especially your now bucket (emergency savings).
Review your bucket with your partner regularly. Regular financial discussions with your spouse or partner help maintain emotional and relationship well-being regarding finances. Tension between two people concerning money and finances can chip away at your relationship. See our helpful resources on having conversations with loved ones concerning money.
Finally, enjoy your bucket savings strategy; hopefully, you will find the benefit of this structured yet flexible approach to savings to be a valuable tool on your financial journey!