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Karen Telleen-Lawton: Buckets of Money

Although it’s been years since I’ve scooted my kids off to school in new shoes and backpacks, each new school year entices me into the resolution mode.

An appropriate resolution for our uncertain times is to get serious about saving money for your future. Wouldn’t it reduce your present stress considerably to know you were on track to retire with buckets of money?

The bucket image is helpful for all stages of your financial life. The buckets represent money destinations, such as fixed expenses, variable expenses, savings, and taxes.

Fixed expenses are those over which you don’t have much control in the short term (one year), such as rent or mortgage, property taxes and tuition. Variable ones are everything else: the ones you could trim if needed in an emergency or to improve your bottom line.

These buckets have very different sizes.

The variable expense bucket is like a water glass you drink and refill frequently. It’s a relatively small container because you’re refreshing it every payday.

The fixed expenses bucket needs to be larger. You contribute to it every paycheck just like the beverage glass, but the expenses typically are larger and sometimes infrequent. They’re often stored up for months at a time until a big bill: insurance, property tax, etc., comes due.

Since the expenses are fixed, you can determine how much of each paycheck needs to go in this bucket by totaling your annual fixed expenses and dividing by 12.

The savings bucket may be the hardest to picture, and thus to contribute to.

If your variable expenses fill a drinking glass and your fixed expenses fit a cooking pot, then your savings bucket might be a large MarBorg recycling container. It seems futile even to attempt to contribute to this one, since your drinking glass and even cooking pot are much easier to fill.

Sen. Elizabeth Warren suggests a basic way to allocate to money buckets, gleaned from her years as a bankruptcy judge. She advocates dividing your budget by percentage: 50 percent for essentials like rent and food, 30 percent for discretionary items, and 20 percent toward savings.

Twenty percent!

The latest figure shows Americans save on average about 4 percent of their income. At that rate, it could take 25 years to save just one year’s worth of income. That means the average American is saving for a one-year retirement. This doesn’t jive at all well with our longer life expectancies.

In contrast, a 20 percent savings rate will grow to about 25 times your annual income in about 40 years. At that point, you can draw 4 percent per year forever.

Social Security can reduce that requirement somewhat, and any pension to which you’re entitled reduces the required savings percentage further.

If you don’t have a trust fund and don’t expect your children to fund your retirement, you likely expect to sustain your lifestyle from your investments’ interest and dividends. Therein my recommendation to start moving today toward a 20 percent savings rate from wherever you are.

Next column I’ll make the case for the substantial side benefits of a higher savings rate, and then touch on where you might store these buckets. In the meantime, check out this motivational article as food for thought:

— Karen Telleen-Lawton serves seniors and pre-seniors as the principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara. You can reach her with your financial planning questions at [email protected]. Click here to read previous columns. The opinions expressed are her own.

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