I’ve been sharing the bucket idea with people for a long time and it seems to work. It helps them understand their money and demonstrates what REAL financial planning is.
What I’m about to share with you is a very simple version of it. It’s far more effective if it’s done in a live situation but, hopefully, you’ll get the gist and see the benefit of it.
Money Inside Your Bucket…
Imagine you have a bucket. Inside your bucket will be things like your bank / building society accounts, ISAs, investments and shares. It’s really IMPORTANT money because you can spend it straightaway. Liquid money, in other words.
Money Outside Your Bucket…
Outside your bucket you’ll probably have other assets which will be things like your home, your pensions and, perhaps, buy-to-let properties. These are outside your bucket because you can’t spend them in the same way as the money inside your bucket. They’re a different kind of wealth.
It might be that the money outside your bucket finds it’s way in to your bucket at some point in the future. For example, you might downsize your home or start accessing your pensions and the money you free up from doing these things would flow in to your bucket.
For now though, these things stay outside your bucket, until you need to call on them. Make sense?
Your Current & Future Inflows…
Going in to your bucket, on a regular basis, are your current inflows. This will be things like your salary, dividends, interest, rent, etc. They’re going in to your bucket and are added to the money that’s already inside it.
One day, though, some (or all) of these current inflows will stop. They’ll stop when you retire or, what I call, become financially independent. At this point, they’ll be replaced with your future inflows which will be things like your state pension or final salary pension through work.
These are sources of income that you can rely on for the rest of your life. They’re going to be guaranteed and won’t fluctuate.
Now then, on this basis, your bucket will just fill up and overflow. But there’s a problem. Attached to your bucket are taps which are draining money from your bucket like you wouldn’t believe! These taps represent the cost of your current lifestyle and also the cost of the lifestyle you want to have in the future.You’re likely to have 4 taps:
- Current lifestyle. This is the cost of you having a great lifestyle now and, why not, we all know that life’s not a rehearsal.
- Have fun lifestyle. When you’re financially independent and you’re young and fit enough to have a great time, whatever that might look like for you!
- Later Life (or Too Old!) lifestyle. Your knees have gone and you can’t get up the stairs, let alone a mountain. I’m being flippant but you get my point. Here, you’re spending is likely to go down.
- One-offs. These are going to be one-off expenses that could seriously impact on your bucket. Perhaps a world cruise, changing the car, paying for a child’s wedding, etc.
Understanding what life is costing you now and what you THINK it will cost in the future will give you a good idea of how big your taps are!
So, let me do a little recap:
- You’ve got money inside your bucket which you can spend now.
- You’ve also got money outside your bucket which you MIGHT spend in the future.
- You’ve got your current inflows which, one day, will stop.
- And you’ve got your future inflows which, one day, will start.
- And then, you’ve got those taps which are the cost of your current and future lifestyle.
Make sense so far? It’s not that complicated is it?
The big question is… WHAT’S GOING TO HAPPEN TO MY BUCKET? Are you going to have enough in your bucket to cover the cost of your current and future lifestyle or will your bucket run out? From a financial planning point of view, this is really the only thing that matters.
Which One Are You?..
The chances are one of two things will happen. Either your bucket will run out, or you’ll die with too much money in your bucket? Neither of these outcomes are great but it’s better to know now, while you can do something about it!
Of course, if your bucket runs out, you’re going to have to turn down (or turn off) your taps which means you DON’T get to live the lifestyle you want. How sad is that?!
Dying with too much money has a couple of major disadvantages (I know that sounds strange but hear me out!).
- You’ve paid tax all your life (income tax, capital gains tax, stamp duty, etc.). If you die with too much money, your estate might have to pay another 40% tax on a big chunk of it.
- But what’s worse about dying with too much is that it could mean you didn’t do more with your life. Maybe you could have done more fun stuff or, perhaps, retired earlier?
Our job is to make sure neither of these things happen to you. To help you to manage your wealth (inside and outside your bucket) to ensure a number of things:
- We want to make sure you can have a great life NOW without it impacting on your future plans. You can’t scrimp too much now because, for too many people, tomorrow doesn’t come. It’s about getting the balance right.
- We also want to make damn sure you have a great life during your ‘have fun’ phase while you’re fit and able to do so.
- And then, of course, we want to take care of your ‘later life’ period when your needs will change and you’ll want more financial security and peace of mind.
Our job is to help you do all of these things without ever running out of money or dying with too much. That’s why we call what we do lifestyle financial planning. Managing your wealth to give you the life that you want. Why else have wealth if it doesn’t give you the life that you want?
I hope this blog has got the message across. I hope you can see that the concept of the bucket is pretty straightforward but goes to the heart of what most of us worry about when it comes to money and our future financial security.
You may already be ‘financially independent’. You may be in the ‘later life’ phase of your life but that doesn’t mean planning for the future doesn’t apply to you. It does. Believe me, knowing what’s going to happen to your bucket can be a truly liberating experience!
Until next time…