Three buckets that will help all generations with their money

Some simple tips that can really make a difference to your retirement years

Three is a number that is used for many situations and has always been important to me. I have based my life on three pillars: family/friends, career, and music. I was always told, when giving presentations, to leave the audience with three key messages.  Dad would sing the nursery rhyme Bah Bah Black sheep which had three bags of wool, I was told by my mum that things always come in threes (this was generally when bad things happened) and, when I talk about financial wellbeing, I always talk about the three buckets.

Those buckets may not always have the same labels, but they are a good analogy that can be easily visualised and applied no matter what age or stage you are.

Children’s three buckets

There is clear research that the earlier we can help our children manage money the better chance they have of developing lifelong habits that will help them navigate a more enjoyable financial journey.

At a young age I got to learn first-hand how to handle money. My dad had an early morning milk run, so every day before I went to school I would help him count the coins and tokens to value the day’s take.  As a kid seeing all those coins was mind blowing, especially given I got about 50 cents a week pocket money. When I started to work on the milk run at the age of 12, mum would get me to split my week’s wages in three ways. I could keep a third to spend that week, I then had to save a third for short term purchases (I was just starting to buy records) and invest the rest into the bank to finally pop in a term deposit. That money went towards my first home and the feeling of satisfaction at 22 when I was handed the keys to the door was still one of my proudest moments.

It’s unlikely these days you would get your kids into a paying job at 12, or in their first home at 22, however if you are giving them a weekly allowance why not start the three bucket approach, with the following labels:

·         Spend a little today

·         Save a little

·         Give a little to others

The first bucket is likely to be empty by the end of the week, but if it isn’t then what’s left can be moved to the second bucket or bank account. This can be used for those things they want to save for, a habit that will also help them learn the value of money.

The third bucket is a great way to show the value of helping others. There is nothing more satisfying than giving money to an organisation that you believe is making a difference.

All three of the above are great life skills to acquire at an early age and an awesome foundation to build their understanding of how money works and that it doesn’t come out of a machine or a piece of plastic.

Adult three buckets

This group hasn’t got a specific age, but depends on which stage you are at in your adult life. You could be just starting your first job, at university, earning while you are learning a trade, or well into your working career, in a relationship and perhaps with a family. The three buckets may change in size but they will generally look like this:

·         Short term: protection - emergency cash account, insurance

·         Medium term - savings/investment for first, car, holiday, home deposit, student debt and mortgage repayments

·         Long term - KiwiSaver, managed funds and other quality growth investments

The first bucket can have a material impact on your overall wellbeing, not just your financial wellbeing.  This will cover life’s lumps and bumps as you start your career or have growing commitments as you progress through the accumulating years. The emergency or buffer account helps cover things like redundancies or life events that you need cash for. If you don’t have this protection (the rule of thumb is three months of your salary or wages), then it is likely you will, at some point, need to access high-cost debt (credit card, personal loans or even worse payday lenders) that, in a short period of time, could bring a life time of problems.

The second bucket sits mainly around your short and medium-term goals. Bank accounts and term deposits are good for these, if your timeframe is less than five years. However, if you are looking to build a larger amount of savings, say for your first home, then manged funds could be a good option depending on when you will need to use the money. 

This is a great time to seek financial advice from a qualified financial adviser.  Having a plan and getting the right investment options that are appropriate for your own personal circumstances is another very good investment. It may look like a cost in the short term, however, treat it as your own personal roadmap specifically designed to help you get where you want to go.

The third bucket is paying yourself forward. Using the benefits of KiwiSaver, a wider range of investments and the power of time and compounding interest to keep your hard earned savings ahead of inflation. This means that when you decide to stop work you can do those things you have always planned to do.

Over our working careers these buckets will change in size and, ultimately, importance as you get older. For example, when you have significant financial commitments, like a new home with a lot of debt, or a young family, having a good buffer and insurance will be important, to protect as much as you can for any life emergencies.

At the other end of the scale your long-term bucket, while being pretty small in the early years, will be a lot bigger when you get to the end of your working years – as long as you keep contributing regularly.

Retirement three buckets + one bonus bucket

Which leads me to the final three buckets you should have before you finally kick the bucket, so to speak.

·         Short term - bank and term deposits. This is the money you do not want to put at risk. It will pay for those trips, hobbies, or experiences you planned when you decided to finally hang up those working boots.  They will most likely be things that you won’t be able to do as much when you get older, so the time to enjoy these activities is right now.

·         Medium term: KiwiSaver and other managed funds. This bucket is designed to refill the first bucket over time. But, given you might not need the funds for say five to 10 years, you can allow your investments to be exposed to more growth assets like shares, property, and bonds. A good diversified fund might be all you need, depending on your circumstances.

·         Long term:  We all know, on average, we are living longer and the real fear is not having enough income to live as long as we do.  Many of us will have to accept that we will need to eat not only our interest but also our capital at some stage. This is never easy, especially as we have spent 40 odd years being told to save and not spend. Without knowing our end date we need this bucket to work extra hard for us and keep ahead of that nasty thing called inflation.

Your savings may not be needed for another 15, or even 20 years, so exposure to growth assets will generally help the cause.

I see no value in being a rich corpse, but you may like to provide an inheritance for your wider family and this means those funds will be better off in a long-term investment. Key message here is that, while making that decision, you don’t let it impact the quality of your life in retirement.

Seeking some professional financial advice before you get to those so-called golden years will really help you plan what you need, depending on your overall objectives, and how much should be in each of your buckets.

As a bonus for going past ‘Go’ or in this case turning 65, in New Zealand we have an extra bucket which is very special and that’s called National Super. If you meet the criteria, it’s a bucket that keeps filling up every fortnight, whether you use it or not, until the day you die. While it is not designed to give you a great retirement, it is there as a foundation to help you with some basic living costs and that is the one bucket we need to make sure is there for our future generations.