Whether your goals are short term or long term setting goals is critical to the financial planning process. Goal setting is not just useful in finance but also in business and personal endeavors. An article within the American Academy of Psychology provides evidence that writing down your goals increases the likelihood of accomplishing them. Alongside creating a goal is ensuring you have a great way to measure your progress along the way.
Many of you do this on a regular basis already with your retirement contributions. That money never even hits your bank account and after years of blindly saving (and investing) you find you’re pleasantly surprised with the work you’ve accomplished. Yes, you can pat yourself on the back for setting up an amazing auto-pilot system. Today, many retirement plans have adopted the automation of not only contributions but annual increases as well! This allows each employee to enroll in a program that will increase your contributions by 1% each year such that you save just a little bit more beginning in January. In fact, Fidelity did a quick formula to indicate that saving just 1% more beginning at age 35 could increase your retirement savings by $85,000 at retirement.
So we convinced you to set goals and that autopilot is a great way to make sure you hit them. If we want to save for more immediate goals than just retirement, how do we hit our shorter term goals? It’s something we like to call savings buckets.
Let’s talk buckets
As a planner at Origin, we like to create measurability through “bucketing”. Yes, I understand the concept of bucketing may take you back to your childhood years (or to your current child’s schooling) where you have 4 available baskets and each one gets a different type of toy: balls, blocks, stuffed animals and musical instruments. I’m sorry to say that bucketing with your finances isn’t too much more complicated than that except its impact can be quite large.
The most common bucket that most individuals are familiar with is the emergency fund. Many of you understand that there is a certain amount of cash that should be available and set aside for a rainy day. To ensure there is no confusion with your checking account we always suggest you pull your emergency fund into a separate savings account for two main reasons:
- We want to make sure this is not considered extra money to spend on day to day activities
- It allows you to get a higher yield on money that should rarely be used, unlike your checking account.
Bucketing, however, takes this concept one step further. Bucketing instructs you to create separate and distinct accounts for all your savings goals. That means you have one goal for your travel, one for your wedding, and one for your home goal. It’s helpful to utilize these buckets for shorter term goals because they are typically cash accounts. If buying a home is 5+ years down the road, however, you can commingle those savings with your longer term savings investments as long as you manage the risk of those investments. In fact, this is another way bucketing can be valuable: it allows you to alter your risk based on the timeline of the goal.
Let’s look at an example of how this looks:
When it’s drawn out in such a manner it becomes much easier for you to see what goals you are targeting (i.e. visualize each fund) and also to see how you’re progressing. Even more importantly you keep money out of your hands, reminding you what it’s for. If you have an account with $50,000 in it, what’s the harm in taking $1,000 out for a shopping spree? Labeling and creating these accounts can psychologically make it hard to deviate from the plan.
How do I prioritize my buckets?
As is the case with all prioritization, the most important buckets should be funded first. However, we don’t necessarily need you to complete the funding of one to start another. Without question, the emergency fund will always be your first priority. If you don’t have one, or enough saved, we will always want you to focus on this first. However, once you’ve reached about half of your goal or at least $5,000 you can start to contribute to your other goals simultaneously.
Prioritizing other goals should really be based on timelines. The sooner you need the money, the sooner you should focus your savings on that goal. This does not, however, mean to neglect your retirement because you are 35 years away. Retirement should always be a bucket you contribute to, even if just 2-3% of your income. In general, here is how you can prioritize your buckets:
What about when you hit your goal?
Even better. Bucketing ensures you don’t over save for your goals and hold onto more cash than you need. At times we find clients who have been saving automatically for so long they have too much money that isn’t working hard enough for them. While this sounds like a good problem to have there is an important balance between cash and investments.
The goal with saving is to be able to hit enough of your short term goals that you can eventually invest money “for the future”. This is money that doesn’t necessarily have a goal but ultimately may end up being used for retirement or goals you can’t even think of today! This can take time though, especially if you are just starting your career. You’ll need time to grow your salary and practice with keeping expenses low.
Bucketing by itself won’t do the trick.
In order for this to work and truly help you hit your goals, you need to set up automatic contributions from your paycheck or checking account into your buckets. We all know that life happens. There can be several reasons that you look at your bank account and either (a) forget to move your monthly home savings amount into the home savings fund or (b) you see that extra $200 and decide you’d prefer to treat yourself.
While we are all for treating yourself, we want to budget for those things and not eat into your savings goals to do so. If money is automatically deposited into your home savings goal, you won’t even know you had it.
A few tips
- Fees and minimums -When you are opening your separate savings accounts make sure you check to see if there are fees or minimums for those accounts. Some of your goals may not be very large and you don’t want a bank that will charge fees on this account.
- Label the accounts - It’s so hard to keep things straight if you don’t label the account. See if your bank will let you do this.
- Set up those auto-payments right away!
We've got even better news: Origin can do all of this for you with its platform. You can create your individualized goals, set up automatic contributions and see how your savings increases over time. We are here to make these types of savings easier for you.
If you have any questions about savings and what’s right for you, contact your Origin planner.