Bucket 2 – Part 2

Based on the title, I hope you aren’t thinking, “here they go with the buckets again”. So stay with me, because that is exactly where we are headed! If you are a client of ours, you know that when we are planning with clients we are always talking about the three buckets. Over the years, we have found and received amazing feedback in regard to the buckets. As advisors we are often referring to the buckets in our own personal financial plans. Today, what I want to do is speak specifically to bucket #2, which we often refer to as the “middle bucket”. As a refresher, bucket #1 is the emergency fund or all cash that you have easy access to and bucket #3 are long term accounts, think retirement type accounts that you cant touch until you are 59.5 without taxes and penalty.

When we are planning with clients on their bucket 2, we always say to think of this as 3 to 5 year money. Money that you know you will not need access to or need to touch in the next couple of years – so we want this earning more than point nothing in the bank, like it is right now. Typically, the allocation on this is around 60/40 stocks to bonds. With the thought being, even if the market is down there always is 40% in bonds that we have easy access to – this also helps in most circumstances to never have to sell stocks while they are down. The only time we have ever seen a financial plan “go-wrong” was when the market was down and someone had all of their money in real estate or stocks, forcing them to sell to get cash and taking a loss. This is what happened to many in 2008 and 2009 during the financial crisis. Having an ample emergency fund and a portion of the investments in bonds, this should never happen.

So, what exactly is “part 2 of bucket 2”? Glad you asked! It can be a couple of different things. If a client has the right amount in an emergency fund and has funded their bucket #2 to the point where they have cash and bonds that could help them get by for 3-5 years assuming they had no income and the market was down, then its time to start looking at bucket 2 part 2. At its core it is still just an investment account either held individually or jointly by spouses that you would have full access to if you decided you wanted the cash back. But, because we know we don’t need this money within the next 5+ years we want to allocate it across more stocks than bonds in search of long term growth. This could be done through standard asset allocation, or through a more specific sector like technology that over the long-term as it continues to be adopted more we believe will see solid growth.

The other part of bucket 2 part 2 is real estate. I would estimate that about half of our client base holds some sort of real estate as an investment outside of their primary residence. Although real estate is not as liquid as an investment account. It does still need to be taken into consideration as part of the overall plan because it is building up equity and growing – sometimes even more so than the market – like we have seen in Nashville over the last 10+ years. And often times if it is an investment property you will be receiving income from this as well.

At times it can seem like building out a financial plan is never ending, but that doesn’t mean that it needs to be difficult. Which brings us back to the simplicity of the three buckets. Multiple times after meeting with prospects we have heard, “wow, I thought this would be much harder to map out”, which is why we continue to use the three buckets as the main planning technique with our clients. Whether you are just getting started saving with $5,000 or are looking to retire with $5,000,000 saved up, the three buckets can help to build out a financial plan for you that can help to achieve your goals and find financial peace through life’s many seasons.

As always, if there is anything we can do for you, or if you have any questions – do not hesitate to reach out!

Please consult with your financial advisor if you have questions about these examples and how they relate to your own financial situation. Investments or strategies mentioned may not be suitable for all investors. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Any opinions are those of Myles Zueger and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.