The bucket approach is the strategy of budgeting by category. You can categorize cash into buckets for different short- and longer-term needs such as living expenses, emergencies and short-term goals. For daily expenses, keep funds readily on hand for groceries, bills, utilities and the like. You should also have an ample emergency fund for the unexpected and a health savings account for medical expenses — giving you a good starting nest egg for your retirement savings account.
“The first [bucket] is short-term needs — assets you have designated for targeted short-term expenses and six to 12 months’ [worth] of safety money,” Drago said. “Generally this is money that has a one- to three-year timeline. The second bucket is three- to five-year or mid-term money. These are generally in more conservative investments such as bonds and CDs. Also, the second bucket replenishes the first bucket as you deplete those assets for immediate needs.”
“The third bucket is your long-term planning money,” Drago said. “The goal is to grow the assets and use them in the future to generate income or replenish the other two buckets.”