Yes, buckets. I like using the 2 bucket method for washing the cars. One for mucky water, one for clean, soapy water. A bit of faff? Trust me, it’s the way forward.
How do you manage your money? All in one pot? I was talking someone recently and we talked about 3 buckets for their money, hence thought I’d share in case it may help you too.
One, shorter-term – cash. This can be for emergencies, unforeseen requirements and just the nice feeling of having cash to hand. Yes, cash savings may not really return much in the way of interest these days, but the reason for holding cash should not really be for the gains.
Secondly, medium to longer term. Depending on your aspirations and plans, this could be the place to consider investing. If you’re able to effectively tie-up some money for 5years+ and ride out the inevitable ups & downs of investing, then over time, the hope is that you’ll make some gains. If these gains are held in ISAs, then such gains are completely tax free. Happy days.
Third bucket. Pensions. This is for the long term.
There are a few different types of pension and there’s a reasonable chance that you have more than one. Pension contributions provide immediate tax relief and can be useful to help reduce your income subject to tax, or mitigate against the higher rate child benefit tax or the reduction of the personal allowance if you earn >£100k.
What to do?
The three buckets noted above are not in a definitive order, but cash should be the priority for any financial plan. Can you afford the basics, can you pay for the repairs, the holidays, the cars? I would suggest you look to hold 3-6 months worth of expenses in cash. This might seem like a lot, but you’ll be glad it’s there when you need it. Trying to balance your savings inputs between the three buckets is not necessarily straight forward, but I would suggest not saving into one alone, but try and pay attention to each of them. Equally, don’t have too many. It’s important not to have so many buckets that you can’t keep track. One to two of each bucket would be plenty.
Getting a pay-rise or a bonus? Why not top up your pension? Do you need that extra cash?
If you’re thinking of buying a house, depending on the timings, buckets one & two will be the priority, but don’t forget about your pension.
How much cash are you holding relative to investments? A couple I met recently had 95%+ of their liquid assets in cash. For most people, in most situations, that is not helping them towards their longer term aspirations.
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Thanks for reading and