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The Four-Bucket Approach to Investing

November 19, 2019

When I was younger, my family joined the town pool so my mom had something for my brother and me to do during the summer. I remember walking through the welcome gates of the pool for the first time and glancing to my right only to see a big bad diving board hovering 10 feet in the air.

Sure, all the kids looked like they were having a blast jumping off this thing, but to me, no way, I’m not going over there.  Now, I don’t think I was necessarily scared of the actual diving board, but just more so about what would happen if I got out of my comfort zone and jumped off it.

Well, one beautiful summer day I must have been feeling myself because I decided to end this game of “what if” and climb that 10 ft ladder.  The result was not surprising to most who have heard a story like this before.  I loved it!

Where am I going with this story of 10-year-old Rob who was afraid of a piece of aluminum?  Investing can be DAUNTING. You may need to get out of your comfort zone or risk being the one watching everyone else have fun.


Millennials Hoard Cash

BlackRock’s Global Investor Pulse Survey showed that Millennials are holding the most cash of any generation at 65%.

There is no magic formula to making money by investing, but there are some things we can do to accomplish our goals and make sure we are making the best financial decisions.


Four-Bucket Approach

I’m a big fan of the four-bucket approach to investing. It goes like this:

Bucket #1 (Immediate funds) – This is the most conservative bucket you’ll have. We’re talking cash. Let’s start by having a checking account that your income goes into and you pay your expenses from. You should have a pretty good idea of how much you’ll need on a monthly basis from an expense standpoint, but if you don’t, make a spending plan so you know where your money is going.

Bucket #2 (Savings + 1-year big expenses) – Next, you’ll have, ideally, three to six months of expenses set aside in a high-yield savings account earning 1-2%. This is your emergency fund for an unexpected big expense or something worse, you lose your job. In addition to your 3-6 months of expenses, you’ll include whatever big expenses you expect over the next year in here as well. For example, my wife and I are planning to purchase our 1st house around January 2021, therefore, I will make sure that my house funds are moved into my high-yield savings account come January 2020. We CAN’T lose these house funds to a market loss, so I will sacrifice a year’s worth of upside in the market for the STABILITY of the savings account.

Bucket #3 (2+ years out) – Other than a house purchase, we have no immediate goals that we will need funds for, so I want to make sure our money is working for us. These funds will be invested in no less than a 50% equity to 50% fixed income portfolio consisting of mutual funds and/or ETFs. Preferably, 60%/40% or even 70%/30% as long as you can stomach some volatility.

Can you afford to suffer short term drops in your portfolio? If the answer is yes, then this is the right bucket for those funds.

Bucket #4 (Retirement) – Yes, you may only be in your 30's now, but 60 is knocking on the door.  Actually, that was pretty sad to think about so I take it back, but just know that you NEED to be saving for retirement. Get your company match at the very minimum, or if you're self-employed, open a Traditional/Roth IRA or SEP IRA. At your age, 70%/30% equity to fixed income portfolio is the minimum amount of risk you should be taking in a retirement portfolio, but I prefer 80%/20% or 90%/10%. Compound interest is your friend. Introduce yourself.


This bucket approach will make sure you have your dollars working for you without taking too much risk for some of your short-term needs.  As the years progress and goals become 1 year or less, it’s time to shift funds from one bucket to another.  Just remember, there are not too many people who can make enough money from their salary alone to become very wealthy in and of itself -- YOU NEED TO INVEST.


Fun Fact: The last letter added to the English alphabet wasn’t Z – it was the letter J.


Disclaimer: This is meant to be general information and is in no way a recommendation for any investment product.