Your 6 Money Buckets – When and How to Fund Them

Once you start making some money as an entrepreneur, a natural question is what you should do with the extra cash. Consider structuring your finances in terms of 6 Money Buckets and work your way through the list in order on the road to financial security.

Money Bucket #1 – Household Expenses
Everyone has this money bucket in some form. It’s the checking account you use for things like paying your bills, making withdrawals from the ATM, and receiving paychecks. Put yourself in a situation that you do not need to watch and monitor this account on a weekly or daily basis to make sure it’s sufficiently funded. Your time is better spent figuring out new ways to grow your business rather than constantly shuffling money around to make sure you can pay the mortgage and credit card bill. Keep at least one to two months of living expenses in this account at all times.

Money Bucket #2 – Business Expenses
Much like your Household Expenses account, your business expenses account is a checking account used to cover all of the costs of running your business and receive revenue from your customers and clients. And similarly to Bucket #1, avoid riding the edge with this account as well. Permanently park at least two to three months of business expenses in this account to avoid the need to micromanage the flow of cash in and out of your business and instead use your creativity to tap into that next great business opportunity.

Money Bucket #3 – Security Fund
Money Bucket #3 can also be referred to as your Emergency Fund or Rainy Day Fund. Financial emergencies happen, whether in the form of unexpected, large medical bills, major home repairs or loss of employment. Stash at least six months of living expenses into Money Bucket #3 to take short-term money worries completely off the table.

Open this as a separate account from your Personal Expenses Account. Also, since this is seldom-used money, consider parking it in an online savings account to grab a little interest income. I prefer Ally Bank based on their attractive interest rates and ability to directly link to my Personal Expenses Account.

Money Bucket #4 – Business Expansion Account
Next on your list of accounts as an entrepreneur is your Business Expansion Account. Funding this account prior to funding your retirement account sends a powerful signal to your subconscious. You are effectively letting yourself know that you are confident in your ability to grow your business.

When I think about making this choice, it goes something like, “I have many, incredible opportunities to expand my business. I’m far better off parking my extra cash in an account I can access to take advantage of these opportunities rather than tying it up for the next 20-40 years in a retirement account.”

I help my entrepreneurial clients park this money in a Low Volatility Brokerage Account. (Financial industry jargon alert!) Typically I invest this money in short duration Municipal Bond ETF’s that accomplish three things:

• Allow for easy liquidation so that you can have the money for business purposes within three to five business days.
• Give you more return potential than an online savings account with limited downside risk.
• Eliminate federal taxes on all gains.

Consider talking to your financial advisor about opening this kind of account for you once you’ve funded the first three buckets.

Money Bucket #5 – Retirement Fund
Now that you have funded the first four buckets, it’s time to start setting aside money for retirement. Make sure all members of your household who have corporate jobs are participating in their 401(k) accounts to take advantage of any employer matches.

For you as a business owner, consider setting up one of the retirement plans that is only available to small business owners such as a SEP IRA or SIMPLE IRA. Work with your financial advisor to determine how much money you should be saving to meet your retirement goals as well as based on your current and future expected tax bracket.

Money Bucket #6 – College Fund
If you are a parent, you’re used to putting your kids first. However, when it comes to your wealth plan it makes sense to put them last. Merit-based financial aid is available and loans are available to both students and their parents. Only begin setting aside money for college in a 529 Plan once you’ve funded Money Buckets 1-5.

Your Assignment
Assess your current financial situation. If you have Money Buckets 1-3 (or more) funded, congratulations! You are well on your way to long-term financial security.

If not, that’s OK. Consider putting plans in place to revisit your spending and saving decisions to fund each bucket in order as a part of your long-term wealth accumulation plan.