Understanding your “bucket” and what it means for your financial planning

Financial planning can feel confusing at times.

Trying to understand how trusts work, making sense of how taxes may affect you or your business, or getting your head around the intricacies of portfolio management can be overwhelming.

Of course, that’s where a financial planner can play a key role by demystifying some of these concepts and explaining how they can work for you in practice.

But sometimes it’s useful to return to basics and understand exactly how your money works for you on a day-to-day basis. This is where your “bucket” comes in.

Your bucket is essentially the money you have at your disposal at a given time, and how you manage it is key to your long-term success. It’s an integral part of your financial plan but is often overlooked in favour of the more complex elements.

Read on to find out more about your bucket and what it means for your financial planning.

Your bucket can only be filled with your liquid assets

Whether it’s water to hydrate your plants or bleach to clean your floor, real buckets are typically filled with liquid. Likewise, your financial planning bucket is only filled with liquid assets.

Liquid assets are things that can be easily turned into money. These include:

• Cash
• Savings accounts
• The value of ISAs, shares, or bonds that can easily be liquidated.

The money in your bucket should ideally be accessible within just a few days, so you can spend it when you like.

Many of your most expensive assets are not in your bucket

You likely own several expensive assets that form a significant portion of your wealth. For example, your pension or your house may well be the most valuable thing in your possession.

However, it’s important to remember that illiquid assets (those that are not easily transferable to cash) are not part of your bucket, as they can’t be spent.

If you one day decide to sell your house and downsize to a cheaper property, the money you’re left with from the sale can then fall into your bucket, but until then, it remains separate.

Similarly, you may regard your pensions as your money, but until you reach the normal minimum pension age (55, rising to 57 by 2028), you typically can’t access your pension without paying a significant tax charge. So, until you start drawing from your pension, it remains squarely outside the bucket.

You might have other assets outside of your bucket, such as a second property or a business. Because all the money is tied up in these assets until they are sold, they have to be treated differently in the context of your financial planning.

You fill your bucket with inflows of cash and empty it with taps

Your bucket is not a static entity and is constantly being filled with inflows and then emptied by taps.

If you’re still working, your earnings are a regular flow into your bucket. Other inflows include:

• Dividends
• Child benefit
• Interest
• Rental income

There may also be other inflows yet to come, such as when you start to receive your State Pension.

Of course, as well as filling up, your bucket also drains. There are four main drainage taps to be aware of:

• Current lifestyle tap – This is the cost of you living the life you currently live. It’s the total of your essential and non-essential expenses. This tap remains on until you retire.
• Active retirement tap – This is the cost of you living your desired lifestyle in retirement and achieving everything you set out to achieve after you finish work.
• Late retirement tap – Once you reach late retirement, your needs will change and you’ll typically want peace of mind and security. Other costs may also arise, such as health and care fees. This is the stage of your life when you don’t want to be worrying about money.
• One-off tap – This is for all the unexpected and one-off expenses that may occur from time to time. This might include the cost of a child’s wedding, medical expenses, or home renovations you haven’t planned for yet.

Once you understand what’s already in your bucket, what’s going to be in it, and what’s coming out of it, you have an excellent foundation for ensuring you remain secure and on track to achieve your goals.

Managing your bucket can be the key to a fulfilling life

Without careful management, your bucket risks falling into one of two traps.

The first trap is that it runs out. Your taps were turned on too heavily and the inflow wasn’t strong enough to keep up.

This means you may have to make lifestyle adjustments, either now or in the future, and you might not be able to achieve some of your goals further down the line.

The second trap is that your bucket fills higher and higher, and you barely make a dent in it. While this may not sound like a problem, it can mean that your beneficiaries end up paying significantly more Inheritance Tax (IHT) on your estate when you die, as too much of your wealth remains in taxable, liquid assets.

Moreover, a bucket that’s too full indicates that you didn’t spend what you had while you had it. You don’t want to reach late retirement and feel that there were many more things you would have loved to have done but didn’t because you were unnecessarily worried about your finances.

So, once you understand your bucket, managing your finances is a lot easier, and there may also be more room for enjoyment. A well-maintained bucket can allow you to strike a balance between enjoying the money you have now and preparing for your future needs.

Get in touch

Our team of independent financial advisers in Lewes is here to support you in building and managing a bucket that suits the lifestyle you want to maintain while also securing your future.

To find out more, please get in touch by emailing us at financial@barwells-wealth.co.uk or by phone on 01273 086 311.

You can also read more about managing your bucket and the basics of building a financial plan in our book, Enough?. To request a free copy, please get in touch.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.