What is the Four-Bucket System?

Pandemic has taught everyone the significance of how to plan your finances in your daily life. The situation of loss of business income, job loss and salary deductions have had a great impact on financial management in everybody’s life. There is no better way to plan your financial life than to get into falling into financial difficulties. 

Having a financial goal and aiming to achieve them in a period of time will systematically draw in getting financial assets or creating corpus funds. The goals which can be achieved in a certain period of time like buying a house or buying gold ornaments or making huge investments into assets are all the time framed goals that can be achieved. Here in this article, we discuss the four bucket system which will help you to achieve your financial goals.

Bucket 1- The Emergency Funds
Bucket 2- Short term and medium-term goals
Bucket 3- Long term goals
Bucket 4- Tax Savings  

Bucket 1- The Emergency funds

Having an emergency fund is the first and foremost requirement for anyone who is working on a salary basis or has a business income. If there is job loss or any unforeseen circumstances like a deduction in the salary then managing the home and meeting financial goals will not be possible. 

There is an emergency fund that will come to your rescue. When you are planning to set up an emergency fund then three to four months of salary income should be set aside for your future needs and emergencies. This corpus amount will come to your rescue based on your requirements. Based on your money usage this amount will differ so arrange to have a fund amount based on your requirements. 

Bucket 2- Short-term and medium-term goals

This bucket is arranged to consider your short-term and medium-term goals. These goals should be achievable within a five year term period. These are the goals that can be forecasted with some certainty like a deposit paying on buying a car or buying a home. 

These goals are different from your long term goals which require a more corpus amount to achieve and also a long time frame. Meeting your short term goals will help you in achieving psychological satisfaction. This physiological satisfaction will increase your motivation to set and achieve higher goals. 

Click here for New financial goals after clearing debts

Bucket 3- Long-Term Goals

The goals which are set for a longer period of time like 10 to 15 years will fall under long term goals. These are life goals that are set to achieve once in a lifetime. Goals such as plans for retirement, marriage, child’s education and others. Since these goals are long term and the time frame is lengthy, predicting the exact amount for the requirement is a challenge. Suppose if a person is planning for a child’s education then the future fees of education cannot be predicted exactly the same in the given today’s date. There are various factors that will influence the fees amount like college tuition fees, university selection, course selection and other factors. 

Bucket 4- Tax Savings

This bucket is important because the income that you save on tax is the income that you earn. This bucket will help you in saving taxes and this is equal to earning income. There is a lock-in period of a certain number of years related to tax saving deposits. This is generally five or three years for the tax savings investment. Being invested into a particular fund or fixed deposit for a certain period of time will increase the investment and also save tax money on your investment. Once you get an idea as to which investment you have to select and put your money you can make your investment into these buckets. 

Bank deposits are safe for emergencies and it is also suggested that mutual funds are safe investment instruments. For short term investments, debt funds and corpus funds are safe investments. Equity funds are considered the best investment for long term goals. It is important to note that equity funds are highly volatile and are subject to inflation and the returns are future-oriented which is associated with risk. 

Click here How do you determine financial goals?

Take away

A good understanding of the different types of buckets and the understanding of the importance of savings will help to move money into different buckets. For planning into short term goals move funds into short term buckets and similarly with achieving long term goals move funds into long term buckets. Bank deposits, equity fund investments, mutual funds, debt funds, and hybrid funds are the buckets that you can select as per your requirements. An equity fund is very volatile for short term investments and it is best for long term investments. 

Meet the author
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Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It’s a commercial mortgage banking company. He has a “Doctoral Degree in Commerce” and two master’s degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.



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