Reach Your Financial Goals with A ‘Bucket Strategy’

Whatever your bucket list, odds are that to-do list of life’s goals will require more than inspiration and derring-do. You’ll probably need a bucketload of money, and that necessitates some financial planning.

Your entire life in buckets

It may help to think of all your wealth and possessions — your assets — as residing in buckets. Cash, including what’s in your checking, savings and money market accounts, as well as in CDs (certificates of deposits), is one bucket. Liquid assets are bucket No. 2: stocks, bonds, mutual funds and the like; they’re called “liquid” because they can be converted into cash quickly and with minimal impact to the price received. The third bucket is real assets — real because they are physical, tangible, not just some figure you see in an account — these include your home(s), car(s), jewelry, land, artwork, etc. And finally, you may have alternative assets such as hedge funds, private equity, venture capital, and options and futures — assets that aren’t traditional “vanilla” investments and are typically used by the wealthy to further diversify their portfolios.

Buckets aren’t created equal

All buckets must be filled, but the rate at which they fill up and pour out are quite different. Some buckets can generate cash. Some buckets eat cash. Some you must dip into continually and others are only for the proverbial rainy day. Let me explain.

We all need a cash bucket to pull from for everyday living expenses. Some of those expenses — groceries, rent or mortgage, utilities, clothing — are essential. Other types of expenses — dining out, vacationing, paying country club fees — are elective lifestyle choices. Your cash bucket can make a modicum of cash through interest (money market rates today are around 0.5 percent), but mostly it’s constantly draining and must be continually filled. You pour in your paycheck during your working years, and you can fill it with cash generated through profits from other buckets.

The bucket challenge: keeping them filled

Your liquid assets bucket is one that, ideally, you feed regularly with direct deposits into your 401(k), annual contributions to IRAs and building out a diversified portfolio. Over the long term you watch it grow as the values of those instruments go up and dividends are reinvested. You only ladle out from it for special occasions, like your kids’ education or a boat, and for your future lifestyle choices, such as your retirement or a vacation home. The alternative assets bucket is similar to this, only you probably dip into it even less frequently. Classically, these investments are multigenerational in purpose: for your kids, grandkids, great-grandkids, foundations and charities.

We all need a cash bucket to pull from for everyday living expenses. Some of those expenses — groceries, rent or mortgage, utilities, clothing — are essential. Other types of expenses — dining out, vacationing, paying country club fees — are elective lifestyle choices. Your cash bucket can make a modicum of cash through interest (money market rates today are around 0.5 percent), but mostly it’s constantly draining and must be continually filled. You pour in your paycheck during your working years, and you can fill it with cash generated through profits from other buckets.

The bucket challenge: keeping them filled

Your liquid assets bucket is one that, ideally, you feed regularly with direct deposits into your 401(k), annual contributions to IRAs and building out a diversified portfolio. Over the long term you watch it grow as the values of those instruments go up and dividends are reinvested. You only ladle out from it for special occasions, like your kids’ education or a boat, and for your future lifestyle choices, such as your retirement or a vacation home. The alternative assets bucket is similar to this, only you probably dip into it even less frequently. Classically, these investments are multigenerational in purpose: for your kids, grandkids, great-grandkids, foundations and charities.

As you can see, there’s a complex interplay among these buckets, with the contents of one depending on the contents of another. And no matter the specific calculus of your lifestyle, there’s a single truth for all us. The net generation of cash from the buckets must exceed the net depletion of cash, or all buckets go dry. To keep that from happening takes some careful planning and perhaps the guidance of a financial adviser.

Finally, the bucket-list bucket

The good news is that when you understand the bucket dynamics and have a good financial plan, you will observe your income, bucket No. 2 and bucket No. 4, making enough money to keep buckets No. 1 and No. 3, as well as themselves, filled for the rest of your life (and possibly beyond). Which means you can finally add a fifth bucket: your bucket list! Fill it with skydiving, strolling the Great Wall of China, running with the bulls, cruising in your convertible or lying on the beach in Florida. It’s the bucket that has absolutely nothing to do with making money, but making happiness, and you deserve it. But if your desire for it is more than just lip service, it’s time to develop a bucket strategy to make it happen.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC. Her column on women, families and building wealth appears each Saturday in The Tennessean.