One of the most common questions a financial advisor gets, whether it be from a client in the office, a family member at the holidays or a friend at a social event, is “Hey, I’ve got a little extra money, where should I invest it?”
Regardless of which advisor on our team you ask, the response is likely going to be some variance of the same main question: “How soon do you need it back?”
Our team believes in giving every dollar a job. But that job is dependent upon the goal you are trying to accomplish and, perhaps most importantly, when you are trying to accomplish it. This month we are focused on the job of Bucket 1 money. Bucket 1 money is money you plan to use, or might need to use, in the next 12 to 24 months. These dollars have one primary duty: capital preservation.
When people hear “capital preservation” they sometimes hear “low return” and tune out. We understand that. Bucket 1 is not where you grow wealth. It is where you protect your ability to wait and allow your growth-oriented holdings to remain invested. If your water heater fails in January, your car needs a repair in March and your roof needs attention before summer, those bills do not care what the stock market is doing. Bucket 1 is what lets you write those checks without touching a single share of stock. No selling. No locking in losses. No panic. That is its job, and it is an important one.
High-yield savings accounts, money market funds, short-term CDs and short-term treasuries are all reasonable homes for this money. The goal is not to chase yield. The goal is to make sure the money is there when you reach for it. A good rule of thumb: if you would be uncomfortable watching this dollar amount fluctuate on a statement, it belongs in Bucket 1.
When the S&P 500 dropped nearly 10% and Blue Chip stocks like Microsoft over 30% in March on military actions in the Middle East, our clients with a funded Bucket 1 were reminded that they were prepared for situations exactly like this. Their near-term retirement income, their new house down payment funds, etc. were all unaffected. That is the goal.
So here is your action item this month. Ask yourself: if something unexpected happens tomorrow, how many months of expenses could I cover without touching my investments? If the answer makes you uncomfortable, that is a worthwhile conversation to have with us. Building and maintaining Bucket 1 is not a one-time exercise. It gets reviewed, adjusted and funded as part of the ongoing work we do together.Every dollar has a job. Make sure you know what they are doing.
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