0 Replies Latest reply on Dec 30, 2009 11:18 AM by kmagic22911

    What is Working for Us and Maybe for You


      First and foremost please allow me to salute many of the other posters in the other discussion threads.  I have found much good advice both Financial and Social in a variety of posts.  Thank you.

      Not to be arrogant in any manner I wanted to share what is working for US (family of origina and progeny) and what might work for you.  Obviously demographics is important so I am a 57 Male still working in Healthcare.  My wife is 50 and also still working in Healthcare.  Below is something I wrote for my children and their friends but have found others who have benefitted from this food for thought:

      “Four Bucket Method of Financial Management”


      Some people consider practicing the Four Bucket Method of Financial Management so that “form follows function”. The form is to fill each bucket, the function is to allow all to SWAN (sleep well at night):


      (1) Guaranteed Cash flow (income) Bucket (Liability Directed Money Management and Investing):  Funds that must cover monthly budget expenditure.  If the guaranteed (income, social security, pension, etc.) cash flow does not cover monthly expenditures then (though a hard pill to swallow) cash flow must increase or expenses must decrease.  Budget monies should be in the highest paying, no risk, easy access liquid savings/checking/CD account available.


      Exception Note:  It is the assumption of this author that the users of this strategy is not carrying any debt; credit card or otherwise.  If the user is carrying debt this debt must be eliminated and/or the payments to this debt included as a component of the monthly budget construction process.  Once eliminated the funds previously used to pay these obligations can then be diverted to buckets 2, 3 and 4.


      (2) Capital Contingency Bucket:  Set-aside guaranteed funds to cover “short-term (less than a year)-capital” expenditures that are greater than $1,000 but usually a one time expense.  Examples of this are car repairs or a new washing machine.  These short term capital monies should be in the highest paying, no risk, “liquid” accounts available.  Liquid means is that a family can retrieve the funds in 30 to 90 days.  Of course each user of this method can determine the definition of short term (e.g. three months, six months, etc.) and capital (e.g. greater than $1,000, $5,000, etc.).


      (3) FIREWALL (Cash Flow Reserve Strategy).  There should be anywhere between 3-to 12 months of guaranteed FIREWALL protection.  These are the funds that “guard” a family against the “big bad world” just in case anything goes wrong.  Guaranteed FIREWALL funds should be in the highest paying no risk “semi-liquid” account possible. What this mean is that a family can retrieve the funds in no more than 90-180 days.  A way this author likes to build a FIREWALL especially for younger readers is to put away 1/12 (8.34%) of your take home pay each pay-period.  In this manner, one year (12 months) places one month into your FIREWALL account. In this manner, after 12 years, there is one year’s worth of FIREWALL.  Also, this author calls these funds the PAY ME FIRST funds.  The FIREWALL protects you from draconian events and thus, this author believes, should be the first bill paid (pay yourself first concept).


      Firewall is also known as the Cash Flow Reserve Strategy coined by Harold Evensky.  His thoughts are outlined in the book:  From Retirement Income Redesigned: Master Plans for Distribution.


      Note:  An easy way (especially if you are young) to save a year’s worth of income is to always put away 8.25% of your net income.  If one can save 8.34% of gross salary all the better.  8.34% * 12 = 100% that is each year a person will save one month of salary. Therefore, in 12 years, a person will have access to one year’s worth of salary


      (4)  Investment funds.  These are “discretionary” funds that can be placed at risk.  If they can not be placed at risk then they should not be in the investment money category/bucket.  (As an example, upcoming college money should not be in this bucket [bucket #2 is best]).


      Exception Note:  It is the opinion of this author that another priority and order of business is to contribute the maximum to an individual’s 403B/457B, at the very least that a person captures the MATCH if the company offers one.  These are TIME DEPENDENT CONTRIBUTIONS because once that calendar passes you can not go back.  The author does not necessarily view these monies as investment funds (Investing in one share of GE outside a 403B is the example of investment funds).


      Exception Note:  Another order of business is to fund a ROTH to its maximum.  This too is a TIME DEPENDENT CONTRIBUTION and not necessarily investment funds (Investing in one share of GE outside a ROTH is the example of investment funds).


      Note:  The third order of business is to take any remaining funds and place them in a taxable account.  These are truly investment funds.


      One should recognize that each bucket has its own investment characteristics (for example Bucket #3 can go into longer term CD’s that pay a higher rate of return).  One should also recognize that these are base rules of thumbs and can be expanded or contracted based on one’s ability to SWAN.  For example, one family might feel comfortable with a 3 month firewall and another family with a 12 month firewall. 


      However, and only for the reader's consideration, the Four Bucket Method of Financial Management is offered up to provide a “skeleton of” or “road-map to” family financial management for the benefit of all involved.  It is not right, it is not wrong, it is just something put out there just in case it is good food for thought.

      The above is nothing but opinions and opinions can not be right or wrong; just no appealing (or just appealing).  However, by following this structure the family of origin has been successful and its progeny appear to be coming along nicely as well.  Good luck to all and may you always be able to SWAN.