Topic 1: Four Bucket Ways to Save
If full-blown financial planning sounds too complex, then a simplified system may be better for you, says Dhirendra Kumar
Open-ended savings, where the saver doesn't state a goal but just wants to save as much as possible rarely works. More often than not, `as much as possible' ends up becoming `as little as I can get away with'.
However, in order to start working towards a goal or a target, you need to figure out what amount of money is available for us to save and for what kind of goals. If defining goals is too much work, there are simpler frameworks available. The conventional way of doing this is to divide the income into four buckets based on the immediacy of the need for the money. Let’s start from the long end, which is unconventional, but I'll explain later why?
The first bucket is the one where you put requirements that are 7, 10, 15 or more years away. Depending on your age, this could be retirement, kids' education, etc.
The second bucket is somewhat shorter term, say up to about five years. These could be expenses that you can forecast with more certainty. You know you'd like to buy a house in five years and will need to put down an initial payment. You know that in three to four years, your car will be pretty old and you'd like to buy a new one. These needs are distinguished from the longer-term ones not just by a shorter period, but also because the shorter time frame means that they are more precisely predictable in time and amount.
The third bucket is that of immediate needs and emergency funds. Emergency funds are something that most people ignore. You will probably have a good feel for how much you will need, and 3-6 months of family income is a good place to start.
The fourth bucket consists of the statutory tax-saving investments. It's the odd one out because it can actually be subsumed in one of the first two. However, it should be thought of as a separate entity because it saves taxes and that itself is equivalent to earning. Moreover, depending on how exactly you make your tax-saving investments, there will be a lock-in of at least three years, so the term of investment is enforced by tax laws.
Once you are clear about the buckets into which your savings must be placed, it becomes clear which kind of investments go into which bucket. The best way to get a grip on your future finances is to identify specific goals and plan accordingly. However, as a starter option, the four-bucket system is not a bad alternative.
Source: Times of India
However, in order to start working towards a goal or a target, you need to figure out what amount of money is available for us to save and for what kind of goals. If defining goals is too much work, there are simpler frameworks available. The conventional way of doing this is to divide the income into four buckets based on the immediacy of the need for the money. Let’s start from the long end, which is unconventional, but I'll explain later why?
The first bucket is the one where you put requirements that are 7, 10, 15 or more years away. Depending on your age, this could be retirement, kids' education, etc.
The second bucket is somewhat shorter term, say up to about five years. These could be expenses that you can forecast with more certainty. You know you'd like to buy a house in five years and will need to put down an initial payment. You know that in three to four years, your car will be pretty old and you'd like to buy a new one. These needs are distinguished from the longer-term ones not just by a shorter period, but also because the shorter time frame means that they are more precisely predictable in time and amount.
The third bucket is that of immediate needs and emergency funds. Emergency funds are something that most people ignore. You will probably have a good feel for how much you will need, and 3-6 months of family income is a good place to start.
The fourth bucket consists of the statutory tax-saving investments. It's the odd one out because it can actually be subsumed in one of the first two. However, it should be thought of as a separate entity because it saves taxes and that itself is equivalent to earning. Moreover, depending on how exactly you make your tax-saving investments, there will be a lock-in of at least three years, so the term of investment is enforced by tax laws.
Once you are clear about the buckets into which your savings must be placed, it becomes clear which kind of investments go into which bucket. The best way to get a grip on your future finances is to identify specific goals and plan accordingly. However, as a starter option, the four-bucket system is not a bad alternative.
Source: Times of India