Defining your Financial Goals: The Bucket Strategy

Nov 25, 2019

When defining and planning for your financial goals and how to invest for them, there are various factors to consider, including how much you need to save for your specific goal, how far in the future the goal is, and how long you will need the funds for the goal to last. The Bucket Approach is a strategy developed more than 20 years ago by financial planner, Harold Evensky, and we have found it very helpful to use a as a guideline in working with clients over the years to both define and plan for their goals.

Essentially, the Three Buckets approach uses a time-line based strategy to allocate savings and investments based upon when the funds will be needed. Goals are divided into short-term (now), intermediate-term (next few years), and long-term. More specifically:

Bucket One: Short-Term Goals

Goals that would be part of this bucket include building an emergency fund, which we would advise to be enough to cover 6 – 12 months of living expenses, or any anticipated, out of the ordinary large expenditures such as a new car or home renovations. Investments that are appropriate for Bucket One could include FDIC insured savings accounts and CDs, and money markets. Starting with this bucket is vital because if you have enough funds that are secure and are there for when you need to cover the very short-term needs, you are not pulling from the other Buckets before you should and can stay on track for your longer-term goals. For this reason, it is also very important to replenish the assets in Bucket One as the cash is utilized.

Bucket Two: Intermediate-Term Goals

This bucket focuses on intermediate goals, with a time horizon of 1 – 5 years, and a more balanced investment approach. Examples of goals that fall into this category could include a down payment for a new home, education for your children, or a new car or vacation. Investments suitable for these goals will likely not need to be as conservative as Bucket 1, and some stock-oriented investments may be included. However, it is important that the risk associated with stocks is balanced with some fixed income being that one to five years is still not that long of a time horizon.

Bucket Three: Long Term Goals

Bucket three is the bucket most commonly associated with retirement savings and can also include the funds you may eventually want to leave for your heirs. Depending on the age of your children, this bucket could also include education funds. Because the time horizon typically associated with this last bucket is the longest, usually 5+ years, the investments utilized can be almost all, if not completely growth oriented, with the use of stocks or stock-focused mutual funds and ETFs. The asset mix will be dependent on your risk tolerance. The significance of a long-time horizon is that you and your portfolio should be able to stay the course in the event of short-term market downturns.

Now that we have defined the Buckets and how you should be filling, it is time to define your goals and which Bucket or Buckets should be your focus. If you would like some assistance developing your financial goals and the investment plan associated with them, Peninsula Wealth can help! Reach out today for a free consultation.

Peninsula Wealth is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Peninsula Wealth and its representatives are properly licensed or exempt from licensure. This material is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Peninsula Wealth unless a client service agreement is in place. It is expressly understood that our firm will not provide accounting or legal advice nor prepare any accounting or legal documents for the implementation of your financial planning objectives.