When it comes to investing, one of the most common questions we hear is: “How do I decide what my money should be invested in?” With stocks, bonds, cash, and a world of alternatives—each with different risk-return profiles—choosing the right mix can feel overwhelming. I’m Mike Zarelli, Certified Financial Planner, and in this edition of Money Matters with FSA, we’re going to walk through a simple investment framework that assigns your money different jobs and helps you decide how much risk to take with each bucket.
The Three Investment Buckets Framework
Think of your investment strategy as three distinct buckets, each with a specific job and corresponding risk level. This framework helps simplify complex investment decisions by categorizing your money based on when you’ll need it and what you want it to accomplish.
Bucket #1: The Safety Bucket
Job: Handle emergencies and provide immediate liquidity Risk Level: Low risk, thus low return
Your safety bucket is essentially your emergency fund. Because you never know when an emergency will arise—whether it’s a job loss, car repair, or unexpected medical bill—this money needs to be readily available and protected from market volatility. It is prudent to limit stock market risk with this bucket since you might be forced to sell investments when they’re down.
This bucket should cover immediate needs and provide peace of mind, knowing that life’s unexpected expenses won’t derail your long-term financial goals.
Bucket #2: The Flex Fund
Job: Provide flexibility for medium to long-term goals (5-10 years) Risk Level: Medium risk Purpose: Bridge between short-term safety and long-term wealth building
The Flex Fund is designed to give you financial flexibility for those medium-term goals that are too far out for your safety bucket but not quite long-term enough for additional risk. This might include:
- Early retirement funding (money you need before age 59½)
- Purchasing a second home or rental property
- Major home renovations
- Children’s education expenses
Because you have a 5-10 year time horizon, you can afford to take more risk with this money than the safety bucket. Your allocation might include more stocks, real estate, or alternative investments, with fewer bonds and less cash than your safety bucket.
Bucket #3: The Wealth Vault
Job: Build wealth over the long term (10+ years) Risk Level: Medium to High risk, thus higher potential return Focus: Maximum growth for retirement and legacy planning
Your Wealth Vault has one primary job: building wealth over the long term. With a time horizon of 10, 20, or even 30 years, this bucket can stomach the ups and downs of the market because it has time to recover from temporary setbacks.
This bucket might include:
- Stocks and equity funds
- Real estate investments
- Alternative investments like private equity
- For some investors, individual stocks, cryptocurrency or other speculative investments
Customizing Your Buckets: Two Real-World Examples
What makes this framework powerful is its adaptability to different life situations. Let’s look at two scenarios:
Scenario 1: The Retiree ($2 Million Portfolio)
Safety Bucket: $200,000 (10%)
- Larger percentage due to no incoming paychecks
- Serves as the foundation for retirement income
- Provides the “bedrock” or safety net for funding retirement
Flex Fund: $1,000,000 (50%)
- The bulk of the portfolio for most retirees
- Funds the next 5-10 years of retirement expenses
- Gradually refills the safety bucket as it’s depleted
Wealth Vault: $800,000 (40%)
- Can be more aggressive since it may not be needed for decades
- Often earmarked for legacy planning or inheritance
Scenario 2: Dual-Income 40-Year-Old Couple ($500,000 Portfolio)
Safety Bucket: $50,000 (10%)
- Based on spending $100,000 annually
- Represents 6 months of expenses (solid emergency fund)
Flex Fund: $50,000 (10%)
- Smaller percentage since they have fewer medium-term goals
- Flexibility for potential early retirement or major purchases
Wealth Vault: $400,000 (80%)
- Largest percentage due to long time horizon
- Maximum growth potential for retirement in 25+ years
Key Takeaways: Why This Framework Works
The beauty of the three-bucket approach is that it’s totally customizable based on your unique situation, including:
- Your age and life stage
- Health characteristics
- Financial goals and timeline
- Risk tolerance
- Income stability
This framework helps simplify the complex world of investing by first determining what job you need your money to do, then deciding how much risk is appropriate for each bucket.
Getting Started with Your Investment Strategy
Remember, this is just a starting framework to help you think about asset allocation. From here, you can make more complex decisions about specific investments, how to balance stocks and bonds, and which alternatives might make sense for your situation.
The goal is to avoid making emotional investment decisions during market volatility by having a clear plan for each bucket of money. When you know what job each dollar is supposed to do, it becomes much easier to stay disciplined during both market upswings and downturns.
Need Help Implementing Your Investment Strategy?
At FSA Wealth Partners, we partner with our clients to help them avoid costly money mistakes, make smart investment decisions, and enjoy more of their wealth today and tomorrow. If you think this bucket framework would be helpful in setting up a strategy for your portfolio, we’d be happy to discuss how it might work for your specific situation.
Every investor’s situation is unique, and what works for one person may not be appropriate for another. That’s why we take the time to understand your complete financial picture before making recommendations.
Ready to optimize your investment strategy? Contact us to schedule a consultation and see how the three-bucket approach might work for your financial goals.
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