Bucketize Your Savings

Sep 18, 2014 by

a savings bucketBig mouth money bloggers like me make a living (well, not a living—more like a nickel here and there) mostly preaching to the great unsaved about how they should SPEND LESS so they can SAVE MORE. But if we stopped with that message alone, we’d run out of material after about three posts. To stay in business we’re obliged to torture readers with endless ideas and minutiae centered on how to accomplish each of those two cardinal aims: SPEND LESS and SAVE MORE. In that spirit then, this article explains a technique I think is useful in helping us not only save more, but also save right—not too much, not too little, but just right, like the three bears’ porridge.

“Bucketize” Your Savings

If you’ve been paying any attention at all to financial advice you know you’re supposed to be saving a lot, and for a lot of stuff. You’re supposed to save for emergencies, for next summer’s vacation, for those granite countertops you gotta have, for holiday gifts, for a new used car, for the kids’ college, and of course for your own retirement! But if you’re like most people, your financial assets are spread around a bit haphazardly among a few different accounts at a bank and perhaps a brokerage like Motif Investing or E*Trade.

How do you know whether you’re saving enough—or anything—toward the many goals for which your saving at any given point in time?

Answer: Bucketize your savings!

The Four Savings Buckets

Let’s keep this simple so you don’t leave me hanging here and head over to see Joe of Retire By 40‘s latest photo of his kid.

Visualize your savings occupying four buckets:

  1. Emergencies
  2. Planned Savings
  3. Retirement
  4. Medical and College

First, I’m not going to explain in detail here what I mean by Planned Savings (because if I did you’d head over to see Joe’s kid). See that Planned Savings link just above? Click on it to get the full scoop. I’ll just say here that planned savings are for specific activities or items you want, like next summer’s vacation or a sleigh full of gifts.

I like to think about my savings in these four buckets because each bucket has different rules about how much to save and where to keep the money. Here’s what I mean:

1. Emergencies

Because I’ve already pontificated about the subject enough elsewhere, I won’t go on and on about my ideas for an emergency fund. Suffice to say you need one, and it should be highly liquid and not subject to any risk. Keep your emergency savings in an FDIC-insured bank account.

2. Planned Savings

We’ve all got things we want to buy in the future. And since we all want to avoid the high-interest debt trap so we can reach our goals and not send a lot of money to Capital One and its ilk for absolutely no good reason, we all need to save cash for these things we want. You don’t want to go to the hassle of setting up separate accounts for every item or event for which you’re saving, but it’ll only take you a minute to create on a spreadsheet whatever number of ‘sub-buckets’ you want—one sub-bucket for each goal. When you make a deposit to your Planned Savings account, allocate it to one or more of your sub-buckets according to whatever whim grabs you that particular day. If the holidays come along and you’ve got $32 in your holiday gift sub-bucket, well, either it’s going to be a holiday where you give the usually disappointing ‘gift of love’ and nothing else or you’ll just have to move money on your spreadsheet from the bathroom renovation sub-bucket to the holiday gift sub-bucket and go without indoor plumbing one more year.

If part of your Planned Savings are for goals five or more years in the future, maybe you’ll feel comfortable taking a little more risk with the money to get a bit higher return, say by putting it in a mutual fund like the Vanguard GNMA fund. If you’re risk averse or you aim to achieve your goal in fewer than five years, I’d keep the money in something like a money market account or CD. You don’t want one Wall Street’s regular crashes to wreck your Tuscany vacation plans.

3. Retirement

You know where this money goes: 401(k)s, IRAs, and their brethren. But you may need to save more than what the government allows you to stash in these accounts if you want to play some serious golf and feed slot machines in retirement. In addition to your retirement account, you’ll likely want to save more after-tax money there for your retirement. Depending on your age and risk aversion, you can take more risk with these savings. Recommended reading: Retire Stock-less? Blasphemy!

4. Medical and Education

Start this bucket with a Health Savings Account (if you’re eligible) and 529 accounts for each kid. (If you’re ineligible for a HSA, then take into account your potential liability for medical expenses when you’re deciding on the level of Emergency Savings you need.) Like Emergency Savings, you don’t want to take any risk with savings in your HSA*. How you invest your 529 money depends on how close the attached kid is to college age—the younger the kid, the more risk you might be comfortable taking. For me, I wouldn’t take any risk after my kid entered high school, unless he or she’s as ‘academically challenged’ as me and likely to take six or eight years to pass.

Neatness Counts

Once this is all set up it’ll be a cinch to see at a glance how you’re progressing against each of your savings goals. Is a bucket empty, partly full, or brimming with cash? The neat, simple organization will actually help you save more because you’ll more easily recognize buckets less full than you’re comfortable with, encouraging deposits into such buckets. In the end, you’ll boost your chances of reaching your goals, at all and in your goal’s time frame.

What Do You Think?

How do you like the buckets? Or have you already left me for photos of Joe’s kid?

*Here’s the thing with HSAs: If you’ve got the cash outside of your HSA to pay for unplanned medical expenses, you can think of your HSA just like an IRA. That’s what I do. I’ve never taken money out of our HSA to pay medical costs. Why would I and lose the tax benefit on my HSA earnings when I can pay my medical expenses with after-tax cash savings?

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