Updated: Sep 10
Chatter and laughter accompanied dinner as two old friends caught up with each other’s news. Keren told her friend Ida about how she was planning to use an analogy of a bucket to explain one of the key concepts of personal finance. Ida leant forward as she spoke, drinking in every word. By the time Keren had finished, Ida’s smile had faded and her eyes sparkled with rising emotion.
‘I wish I had understood this when I was younger. I would have travelled more and worked less while I still had my health. I have far more than I need in my bucket now, and I don’t have the energy to enjoy it. Please share this bucket analogy with other people so that they don’t miss out as I have.’
Many of us are told from an early age about the importance of saving. Saving for a rainy day, a special occasion like a wedding, or our retirement. So, we save like crazy and think that we can’t afford to pursue our dreams or retire.
This is a good practice to get into, but it is just as important to understand when to stop.
There is no benefit to saving until our bucket is overflowing. Financial planning is all about achieving a balance – earning enough, saving enough and spending enough on the things that bring us joy.
Picture a bucket. Instead of water in your bucket, you have liquid cash – the money that you can access easily. This will include money in current and savings accounts, as well as maybe some investments like shares that you can sell quickly.
This bucket is topped up while you are working by things like your salary, dividends if you hold shares, family tax credits or social security benefits and maybe income from any rental properties you own. When you retire, it will be topped up by things like your company, private and state pensions and income from investments. Maybe you will receive some inheritance or one-off lump sum payment from your pension. All these things top up your bucket with liquid money.
Some financial investments are NOT included in your bucket because the money is not readily available. This includes your house because it takes time to sell property. If you downsize to a cheaper house in retirement, then the net proceeds from the sale will go into your bucket, but the house you live in – and any properties that you rent out – are not in your bucket.
Your pension fund is also not in your bucket. Any funds you take out of it, either as a lump sum or as income will drop into your bucket at that point.
If you have a business, that is not in your bucket either because it would take time to sell it and realise its value. If you do sell your business one day, that money will drop into your bucket when you receive it. And any income from your business also drops into your bucket as another form of income.
Over time, your bucket does not just keep on filling up. There are taps at the bottom of the bucket, draining the liquid funds from it.
The first tap is your current expenditure. You have bills to pay, food to buy and holidays to take.
The second tap is your desired expenditure. For example, you might want to have children, get a pet that will increase your expenditure on food and vets bills, or take more holidays when you retire.
When your children grow up, you will find that that tap stops gushing quite as much. In later retirement years, you might find that your retirement tap stops gushing as you spend more time at home.
A third tap flows sporadically when you change your car, pay for events such as weddings or make a gift to your children, for example.
And the final tap that might come into play later in your life is that of long-term care.
So, your bucket of liquid money is being topped up and drained off as you progress through life. We all know that if your bucket runs dry, that causes problems. But have you ever considered the downsides of your bucket being so full that it flows over?
Are we really suggesting that you can have too much money?
Yes, we are! Remember Ida, at the beginning of this blog? If you have too much money in your bucket, it means that you have not lived to the extent that you could have done. You have not spent the money that you could have done while you still had your health and could enjoy it.
Another, although in our view, lesser, disadvantage, is that you may be taxed heavily if you die with too much money in your bucket.
As a professional financial planner, Keren spends a considerable part of her time telling clients to spend more money and just enjoy it. Money is not an end in itself, it is there to serve your life, goals, dreams, and desires.
A good financial planner will make sure you don’t spend too much or too little. If you have plenty of money in your bucket, you can use it, enjoy it, give it away to your children or donate to charity.
As the multimillionaire entrepreneur and success coach Dean Graziosi says, ‘If you think that money doesn’t make you happy, you have not given enough of it away.’
It is essential that you monitor the level of your buckets so that you know whether you have enough money to do what you want and live life to the full. A good financial planner will help you with this, or you can make a start with it yourself.
To help you to understand your current and future expenditure needs, Keren has produced a couple of spreadsheets that you can download here.
This is one of a series of blogs on financial planning, aimed at women specifically because of the huge disparity there often is between men and women when it comes to personal finance. What do you wish you had known, that we can share with our readers? Or what would you like to understand better? Please let us know in the comments below or contact us directly: Keren’s email address is email@example.com and Julia can be reached at firstname.lastname@example.org.