ABCs of Investing

The ABC’s of Investing

One of the most important first-steps of any financial plan is to set goals and allocate resources; but often, different goals have differing timelines.

For example: one might be saving up for a new car, a home-improvement project, or building a rainy-day fund – all short-term goals.  Let’s call this “Bucket A” – This is money you may need to spend in 1-3 years, or “deferred spending.”

One might also want to set money aside to help pay for college, a business startup, or a house at the lake.  Let’s call this “Bucket B,” 4-20 years, or “mid-term investment goals.”

Lastly, we all dream of achieving “financial independence” and the goal of retirement.  Let’s call this “Bucket C,” 20+ years, or “long-term investment goals.”

The question then becomes, “How do we allocate our current resources plus future savings and investing so we can make progress on all our goals at the same time.

Let’s look at a hypothetical illustration:

A married couple, each making $60,000 per year, or $120,000 total household income.  They have $40,000 in savings and $10,000 each in their 401(K).

After expenses, they have $2,000 per month available for discretionary spending/savings/investing.

Bucket A – Goal = 3-6 months living expenses, or $50,000 in checking and savings.

  • Let’s leave $30,000 in the bank and add $500 per month from “discretionary spending/savings

Bucket B – Goal = 2 X current income or $220,000 invested in a diverse portfolio of stocks and bonds

  • Let’s move $8,000 into this bucket and add $500 per month from discretionary spending/savings

Bucket C – Goal = 25 X current income, or $3,000,000 (see 4 x 8 Rule) invested in 401(K)s, IRAs or Roth IRAs, or Long-term tax-deferred investments

  • Assuming you are already putting 10% into your 401(K), we open two IRAs with $1,000 each for a total of $2,000, plus $250 per month each dollar-cost-averaged in per month for a total of $500 per month.

In summary:

  • You left $30,000 in your A-Bucket and will be adding $500 per month
  • You moved $8,000 to your B-Bucket and will be adding $500 per month
  • You opened 2 IRAs with $1,000 each and will be adding $250 per month to each in your C-Bucket to augment your 401(K) savings.
  • Leaving $500 to support your Church, or favorite charity

This is a very simple illustration.  It offers no guarantees or promises and was used simply to explain the ABCs of investing

For a personalized, custom financial plan, reach out to our office.

To understand why we recommend 25 times current income in Bucket-C, read the “What Does It Cost to Retire? 25 x – 4 x 8 Rate

To learn more about budgeting vs. resource allocation, read the 70/30 Rule.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.