The Three Buckets Review for Gaining Financial Stability

 

Striking a balance between spending and saving a certain portion of your income is a cumbersome task. The actual reason behind this is the increase in different products and services that promised to help improve your personal lives and career in today’s world. Every here and there, you tend to see different categories of products and services from different manufacturers and marketers, all of which appear useful and appealing. However, in the delaying gratification of this chapter, we have already established the importance of giving up on pleasure that is short-lived over that which is more pleasurable and on a long-term basis. 

The Three Buckets Principle is a concept that explains how well you as an individual can maintain a useful and reasonable proportion in your income between saving, investing and spending. Many people find it hard to actually implement each of these buckets in their daily life and end up going through hell during their post-employment period. Each of these buckets will be explained below with full details on how it works and what is most recommended in each case. 

Don’t forget, the three buckets of financial management are: 

• Save (10%)
• Invest
• Spend

Bucket 1: Save

Saving refers to the act of keeping or leaving over an amount of money after subtracting the desired amount from your disposable income over a certain period of time. A saved amount of money represents an overall excess of funds for an enterprise or individual after all financial obligations and expenses have been taken care of. Saving can take place in different forms, such as keeping the money in the form of cash or its equivalent as a bank deposit which, of course, is not vulnerable to any risk of loss except in case of minimal returns. 

Through the use of a good investment plan, savings can be expanded. It, however, requires that the amount of money will have to be put at stake. In the same vein, saving is a term used to describe the amount of money that is saved or otherwise kept idle and doesn’t experience any risk of investment or consumption through spending. People save part of their income (which doesn’t necessarily have to be excessive) for various life missions and ambitions. Some of these may include a child’s college education, deposit for an apartment or car, retirement, going on vacation, among several others. 

In most cases, it is common to see people save money for the sole purpose of emergencies. Consider for instance a case of an individual earning five thousand dollars ($5000) on a monthly basis. He has the following expenses and financial obligations: Rent payment - $1,300, Car payment - $450, Student loan payment - $500, Credit card payment - $300, Groceries and Utilities - $325, Cell phone - $75, and Gas - $100. The total amount results to $3,050 which implies that there is an excessive $1,050. If this person is able to save the excess amount of money and later end up in any state of emergency, he would be able to resolve it while living on the money.

An individual is said to be living on “paycheck to paycheck” when such a person is unable to keep or maintain savings. They end up getting into debt or bankruptcy when they do not have enough money to sustain themselves in times of emergency. To avoid this, try to save at least 10% of your monthly income for future purposes. 

Bucket 2: Invest

Among the three buckets, investing is the most important one in which extra care must be taken in order not to lose track and end up your hard-earned income. Investing can be defined as the act of putting away your money into a financial scheme, properties, shares, or any other commercial venture with the sole objective of making a profit over time. In other words, it is the act of setting your resources, usually money, aside in order to allow it to grow and appreciate so as to generate income or profit. Just like savings, investing takes different forms, which can include investing in endeavors such as using money to start a business. You can also invest in assets such as purchasing real estate or building commercial ventures where you can earn multiples of what you invested. 

Investments are those entities, assets or items which are dedicated to the sake of investing with the goal of appreciation or generating income. An investment can be money, time, or even efforts and knowledge put into a certain thing in order to get an advantage or make a profit. Investing can be slightly related to delayed gratification in the sense that it also involves the giving out of a particular portion of your belongings (which would have been rather used to achieve an instant pleasure) for a long-term pleasure (when the assets later appreciate). The term appreciation is used to describe the increase in value, which subsequently causes an increase in the price of an entity. Take, for example, an investor who purchases a monetary asset presently with the idea that in years to come, the asset will yield more returns when sold at a value higher than what it used to be.

In the financial realm, the one and only major purpose of investing are to generate a profit that exceeds the invested entity by a certain proportion. While the return is expected to be positive as a result of the appreciation of the asset, it can also be negative or loss which comes as a result of the depreciation of the invested assets. The depreciation so incurred can be attributed to the outdated nature of the asset or its property and, most especially, efficiency (in cases where it is a device or real estate). The return can also be an investment income such as rental income, interest, dividends, or a summation of income and capital gain. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.

An important part of the investment, which will be explained more in the fourth section of this chapter, is the vulnerability to risk. A person who invests, known as an investor, always has to bear risk. The risk to put a huge amount of money on something which is not sure to be relevant in years to come. The risk of losing a huge amount of money to fraudsters and fake agents. Simply put, the risk attached to investment could result from the different factors that contribute to it, such as illiteracy, ignorance, carelessness, etc. or otherwise, comes from the presence of uncertainty. 

Between Savings and Investment

It is common to see people using the words savings and investment as though they are synonyms used interchangeably. One of those instances is like saying someone saved for retirement in a so and so plan which is technically incorrect. Saving for retirement purposes is a long-term dream which makes it more an investment than otherwise. In most cases, money set aside in these cases is used to buy stocks, mutual funds or bonds securities. Making the point clearer, to invest is to put money at the risk of loss which might get replaced by the optimistic expectation of positive returns over a given period of time. On the other hand, savings, as the name literally implies, is saved from any potential loss. 

Also, there is a higher tendency of liquidity and availability for instant gratification for savings than that present in investment. Using a debit card to make purchases, for example, is possible in saving, while on the other hand, investments must first be converted into usable cash before they can be utilized. This not only takes more time but also incurs transaction costs on each conversion made. By virtue of their nature, investments entail the safekeeping of money over a long period of time for the purpose of making it appreciate. 

Bucket 3: Spend

On a daily basis, new products and new services got added to the market for prospective customers. While you might probably need some of these items, most of them are rather irrelevant to your immediate needs. They are just meant for fashion or standing out among peers. A reasonable and foresighted person should not always be interested in standing out with material things. In this way, it would be easy to regulate your spending and focus it on only useful and needed things. Why then is spending so important in our daily activities?

The last part of the three buckets review is Spend. It is, however, a crucial and integral part of it because if proper care is not taken with it, it can render the other two useless. Your savings and investments cannot take place if you are the type that spends just anyhow. Spending is the total amount of money used in the purchase of goods and services by an individual or groups of individuals for their enjoyment or personal use. To spend is to pay for a purchase made or give out money to get what you want or for a non-rewarding cause. It’s the summation of the amount spent on purchasing durable goods, nondurable goods, and services. 

Spending money can take different forms, such as satisfying oneself by purchasing a well-balanced diet in a restaurant outside the home. It can also be for business purposes, such as purchasing a new set of instruments and devices that will help your business become more productive and efficient. Spending can also be for the sake of enjoyment and tranquility, such as going to a night party or lodging at a hotel. It can be an inhibitor of saving and investing or be an end product of them. While the former could be explained as the inability of an individual to save any amount, let alone invest, as a result of bad spending habit, the latter is the satisfaction one gets after saving and investing for a long period of time. 

Hence, it is now crystal clear why spending should be regulated in order to balance and live within your income. A person who spends lavishly is said to be extravagant, while a person who spends less is said to be stingy. It is required for a prospective investor to lie between the two scenarios - not spending much and not denying themselves useful gratification. Whenever you want to spend, either before saving and investing or after reaping the fruit of your investment, it is important that you be very careful so that you don’t end up in debt, bankruptcy or even get broke (state of not having any money to satisfy your urgent needs). 

Here’s the thing, the three buckets principle is an important principle you must imbibe. It is important to take proper care of one’s spending, to be able to save enough, and then invest a lot. Such is the connection between the three.