Recently, The Escapologist offered a new online wealth building series: The 11 Secrets Every Wealth Builder Must Know. It’s free, so if you are interested, check out The Escapologist. They produce some very thought provoking newsletters.
I’m happy to report that the very first chapter ‘The Secret of the Golden Buckets’, has helped me to answer a question I’ve been pondering for a few months.
But firstly, what are the Golden Buckets? The diagram below illustrates the flow of money in our lives. Income flows from the well and into the first bucket, Spending. Whatever amount we spend each month leaks out of our Spending bucket, leaving less to flow to the Saving and Investing buckets. The concept is pretty obvious so I won’t belabour the point.
What was interesting to me was the difference between saving and investing. In this article, the author distinguishes between them because he believes it will help to acquire wealth safely.
Saving and investing are the same in the sense that you are setting aside some portion of your current earnings for the future. The difference is the purpose of saving is to safeguard that set-aside money, whereas the purpose of investing is to grow it.
The Savings bucket
There are two main things the Savings bucket should comprise of.
- Anything you are saving for that you will be paying for in less than seven years, such as saving for a new car, upcoming holiday, home renovation project, deposit on a house or living expenses once retired.
- Start Over Again (SOA) fund – the money you put aside in case of a financial disaster. To start, your SOA fund should have a minimum of three months’ living expenses.
Money in the Savings bucket should only be in super-safe investments – investments that are highly unlikely to go down in value in the next 10 years. These include bank savings accounts, term deposits and safe bonds with short-term durations.
The Investing bucket
The purpose of the investing bucket is to grow wealth. This is the bucket used to fund all future, long-term expenditures (i.e. more than seven years).
If you are young, you may use this bucket to put aside money for your children’s school expenses. But for the most part, the money in this bucket will be for your retirement. And when you look at investment returns from a long-range perspective like that, even a few percentage points can make a huge difference.
The Investing bucket therefore, is where you can theoretically afford to take a few more calculated risks.
My Golden Buckets
When I read this article, a lightbulb went on for me. I have a lot of money in the Savings bucket and I was beginning to wonder if I should just transfer that over to the Investing bucket. However, knowing that I plan to retire in the next few years I was very reluctant to put those funds at risk. This is why I currently have so much of my portfolio in Cash.
The Golden Buckets analogy has helped me to put a value on the amount I need to keep in my Savings bucket, and gives me confidence to move the excess to the Investing bucket. Hurrah!
What are your thoughts on this analogy?
Do you have your own way of differentiating between funds for Saving and Investing?