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You really only have two options when it comes to saving or investing.

You either don’t do anything and leave your funds in a cash account or you analyze your current situation and decide to invest towards whatever your goals are. Both these options have consequences. Good or bad when you decide one over the other this is what happens.

Let’s assume you decided that investing is too risky, you just can’t afford to lose any money so you parked everything in cash. In today’s environment essentially you’ve decided your OK with losing money. What’s that? How can I lose money if everything is in cash? Unfortunately for us there is a thing called inflation which is a measurement of how prices of certain goods and services have risen over time. The U.S. Bureau of Labor Statistics tracks an inflation metric known as the U.S. Consumer Price Index. According to the U.S. Bureau of Labor Statistics this Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. Let’s say inflation is at 1%. If your earning 0.05% in a savings account, you’re actually losing 0.95% in purchasing power every year. Any return below current inflation is the equivalent of losing money. Everybody is different and it might very well be the case that you need to have all your funds liquid and available immediately. I work with a lot of Millennials and Gen X’rs, 18-43 year olds. I rarely see anybody who needs to keep everything in cash especially at such a young age.

The next alternative involves analyzing your current situation. What are your goals? What do you want your money to do for you? What is it you want to accomplish? This involves analyzing your income, expenses and goals. By the way this is what a true financial advisor is supposed to do. A constant error is to only think in terms of risk. When we should be thinking in terms of goals and what exactly is it I want to accomplish in the first place. Don’t get me wrong risk is something we all need to understand but should not be the only factor when determining your course of action. Different goals require different strategies. For ex if you plan on buying a house in the next year or so it makes sense to have your money in short term savings/investment alternatives. The opposite is true if you’re a 30-year-old and one of your goals is retirement planning then you might need to consider more aggressive alternatives. I love the bucket strategy because it lets you segregate different goals into different strategies. There is no perfect way to execute a bucket strategy. Every customer is different and will require a different amount of buckets. For ex. let’s assume I have a 30-year-old customer who has the following goals:

1.       Wants to buy a house in 1-2 years

2.       Retirement Planning

3.       College Planning for daughter

Please keep in mind that this is an extremely simple example for the sake of explaining how this strategy works. That being said we would have three buckets one for each goal. Bucket number one would be for the house purchase and might include regular savings accounts or short term conservative investments. Bucket number two might include the customers 401k and IRA accounts where he can have a diversified portfolio based on his/her level of risk among other things. Bucket number three might include a 529 college savings plan or some other savings option.

I’ve found that when my customers segregate their savings/investments into different buckets they tend to have less stress as they now not only have a plan and a strategy but they understand that every bucket has a purpose and a different level of risk to accomplish this purpose. They now think in terms of goals rather than risk.  

Hermes Conesa CRPC®, MBA

CEO @ SimpleiVest, LLC

Free initial consultation