How Savings "Buckets" Can Help You Reach Your Goals

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Many people are familiar with using buckets as a method for retirement income planning. It's a simple strategy for managing money over a multi-year period, and helps you to apply an appropriate asset allocation for money you will need in a few months, a few years, in 10 years or more. Here's how it generally works:

• Bucket 1: This bucket typically holds one to two years' worth of living expenses, invested in traditionally more stable vehicles such as cash, certificates of deposit, money-market funds or short-term Treasury bonds. Putting money you plan to spend soon into liquid, generally low-volatility investments can help you avoid having to sell riskier investments, such as stock, in a down market to raise cash for living expenses. This bucket should be refilled annually.
• Bucket 2: This typically holds money that you expect to need within three to 10 years, invested in intermediate-term assets with a focus on growth and capital preservation.
• Bucket 3: This bucket typically holds money that you expect to need in 10 years or later, invested for growth and income.

I like to apply three buckets as well.