Matching Your Money With Your Goals

William Miller |

When talking about personal finance, one of the most common terms thrown around is diversification, but it is generally only associated with an investment portfolio. While having diversification in your investments is important, you should also have it in regards to how your accounts are taxed and the liquidity of your money.

Aligning your money with your goals helps with how liquid you need your money to be and which of the "3 buckets” you need to put the money in. The 3 buckets are:

  • A Short-Term Bucket (<2 Years)
  • A Mid-Term Bucket (2-10 Years)
  • A Long-Term Bucket (10+ Years)

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Short Term Bucket

The money that you plan to use in the next year or two years should be in your short-term bucket. For Gen X and Millennials this is your emergency fund and is generally in a low risk/low return place. This money is not expected to grow or give huge returns, but it is there to provide stability and comfort so that you can use your mid- and long-term buckets to grow your assets. Some of the places for your short-term funds are:

  • High Yield Savings Accounts
  • Money Market Accounts
  • CDs (the money put into a CD is not liquid for a certain amount of time)

These account types will have a higher level of stability than investing in the stock market but will not have the possibility of a higher return. Making these types of accounts is great for your short-term bucket. You are taking away the possibility of the stock market dropping in the short term and lowering the value of your money. The money also put into these accounts usually needs to be easily accessible (this is why CDs aren’t usually used).

Having a stable and adequately funded short-term bucket will take some of the stress away from investing for the long term. Even if your invested assets in the stock market go down (which we know happens 2 out of every 10 years) you will have this account ready for anything that may come up.

Mid-Term Bucket

The mid-term buck is often an area that gets overlooked. Many times, people are focused on creating an emergency fund (short-term bucket) and saving for retirement (long-term bucket) but what about everything that happens in between?

A lot happens!

You might start a business, want to travel, buy a house, the possibilities are endless. Having an account that you can access before you retire, but at the same time is working for you, is a key to financial success.

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A brokerage account lets you grow your assets over time while letting you access the funds if you need them. This makes it an efficient tool to grow your mid-term buck and your savings.

Long Term Bucket

The last of the 3 buckets is your long-term bucket. This is the money that you will not touch for 10 or more years. Investing with the mindset that you are not going to be affected if this money drops in value for a couple of years can have a huge benefit because it will decrease the chances that an emotional decision is made. With the average down market happening about every 5 years, it could be expected that in a 10-year period there would be 2 down years (at least). Let’s say there are 2 down years in the 10-years, that would be 8 years that had a positive return and your money had growth.

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In the financial crisis of 2008, the S&P 500 dropped nearly 50% over the course of a couple of years. It wasn’t until the end of 2012 that the S&P got back up to the levels it was at prior to the crisis. That is ~5 years of a down market, but from 2013-2017 the index returned 69.22%. So even with one of the largest crashes in recent history in that time frame 2008-2017, the market returned an average of 8.03% per year. If you didn’t have your long-term bucket set, you would have had to withdraw money from your account possible when it was down close to 50%.

Final Thoughts

As with anything in life, having balance is key. You do not want to be overfunded in your retirement accounts and not have the ability to access funds (without penalty) if needed. At the same time, you do not want to have so much cash that you don’t have enough money to retire someday. Finding the balance that is right for you and stay committed to it, will help you stay on the path to success.



*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes*­­­