What's In Your Bucket?

This week, we're going to take something complicated, and learn how to do it in five minutes. Many millions of words have been written on the subject, but we're going to use only one sheet of paper.

This week, we're going to take something complicated, and learn how to do it in five minutes.

One of your biggest financial challenges is figuring out which investments are appropriate for your needs and goals. Many millions of words have been written on the subject, but we're going to use only one sheet of paper.

Take your paper and draw two horizontal lines, to divide the paper into even thirds. Let's label the top third as "short term - less than 1 year," the middle third as "intermediate term - 1 to 7 years in the future," and the bottom third as "long term - more than 7 years in the future."

Next, think of all your financial goals and needs. Write down these plans in whichever timeframe they will fall. For example, would you like to have the option of retiring in twenty years? Write it in the long-term section. Want to take a vacation this summer? Into the short-term section it goes. Looking to send your high school student to college? "College education" in the intermediate section.

It's now time to write your best-guess cost for each of these goals and needs. This can be painful and difficult, but take your best shot. And unfortunately, for many (most?) people, their needs and goals outweigh their net worth. This is where you will have to start prioritizing, and determining what's most important, and most realistic.

You now have a list of goals, demarcated by time horizon, listed by expense, and prioritized by importance. Let's use what we've done so far to pick appropriate investments.

The top third of our paper lists goals and needs we expect over the next year. Therefore, we need to invest money in a short term imaginary "bucket," using very conservative and liquid (easily accessible)  investments. For these goals, I suggest checking accounts, savings accounts, money market funds, short-term certificates of deposit (CDs), and very short-term bond mutual funds. The goal is to keep this money as safe as possible. The downside, as you might expect, is that with current interest rates so low, these types of investments yield little to nothing. Yet because you'll need these funds very soon, I suggest taking little to no risk with this money. (By the way, emergency funds are generally put in these types of investments as well.)

The middle third of our paper shows our financial needs from one to seven years in the future. For these expenses, I suggest looking for a higher rate of return than that provided by short-term investments. However, I also suggest not taking a large degree of risk with this money. CDs with longer maturities, bonds, and bond mutual funds are most often used in this intermediate-term "bucket."

The bottom third of our paper shows our long-term financial goals. For most people, retirement is #1 in this section (or more specifically, having the wherewithal to sustain a comfortable quality of life throughout retirement). Historically, there have been three types of investments that work well for long-term growth: real estate (both residential and commercial), commodities (grains, oil, etc.) and stocks (individually owned or via mutual funds). All of these investments experience drastic fluctuations in the short term (as we've seen so far this century). However, they all tend to grow over the long term. More importantly, the longer your time horizon, inflation becomes more and more of a concern, and these investments have historically grown at, or greater than, the rate of inflation. Yet because of their inherent risks, they belong in your long-term "bucket."

Let's keep the dialogue going. Please comment in the section below with your goals and time horizons (staying anonymous, of course). I'll respond with some suggestions, and I hope others will chime in as well. We'll use these specific examples to practice choosing appropriate investments. Submit your thoughts, and let's have a group chat!


Lou Dagen is a Certified Financial Planner in the San Francisco Bay Area. For 23 years, he has helped clients around the world retire in comfort, educate their children, and increase their net worth. If you have questions, please post them in the comments below or call Lou directly at 925-997-8507.

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