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Practical Planning Tip: The Basics Of Financial Planning - "Short-Term Bucket"

February 29, 2024

Today we will continue our discussion on the basics. My last set of videos discussed the basics of investing utilizing a birthday cake analogy. Now we will shift gears a bit and discuss the related topic of financial planning using the “bucket approach.” Hopefully, this will make the financial planning concepts more accessible and understandable to viewers. Ultimately, my goal is for folks to apply these important concepts more seamlessly to their own situations.

Before jumping into the buckets, it’s important to define the concept of “financial planning” itself. In short, financial planning is an ongoing process that evaluates a family’s entire financial picture in order to create strategies for achieving their short- and long-term goals. This means being more intentional about where you put each of your dollars to help you achieve your objectives. This process of efficiently managing your assets can help increase the likelihood of financial success. 

Short-term Bucket: The cornerstone of financial planning is proper cash flow management. In plain English, this means spending less money than you make and always having an ample cash cushion for a rainy day. So, how much money is needed in this rainy day, or short-term bucket, category? The answer really depends on personal circumstances, but three to sixth months’ worth of expense money is a good guideline. This necessitates evaluating your monthly expenses and allocating somewhere between three and six times that amount in your checking account in case you need it for an unforeseen expense.

Naturally, some people with a steady income may want to maintain less cash, and others with more volatile incomes may want to have more cash on hand. Furthermore, folks who expect a near term major financial outlay, like a downpayment on a house, a bar/bat mitzvah, or an upcoming wedding, will want to keep more cash on hand to pay for these near-term expenses.

The last point worth mentioning in this category is how to invest these funds. Remember, the key with this money is that it should not fluctuate in value and it should be readily accessible in case of an emergency. This means the funds should literally be sitting in cash or a money market fund with a high level of liquidity. Even if there are more attractive opportunities outside of money market yields, and there will be, however, it would come with some level of risk. Getting the best return on this cash is NOT important. It’s crucial that these funds stay safe and liquid.

You can WATCH the full video here.