How to make strategic cash bucketing work for you

Cash bucketing is a personal finance strategy where you allocate your income into separate “buckets” or categories, each dedicated to a specific expense or savings goal. Instead of having one large pool of money, you break your spending down into segments, which helps you prioritize your financial goals and avoid overspending.

The primary purpose of cash bucketing is to create clarity and control over your finances. It forces you to think about how much money you need for different aspects of your life so you can ensure you aren’t over-allocating funds in one area while underfunding others.

One key part of the bucketing approach is ensuring that you have enough money set aside in cash or other liquid assets that you can access quickly when needed. In addition to covering your expenses – from everyday needs to larger discretionary purchases – your cash “buckets” can be an important resource to draw from when new investment opportunities arise.

Let’s look at how smart bucketing decisions can help you make the most of your strategic cash.

Bucketing basics

To get started with the cash bucketing method, take a close look at your income and expenses. Start by listing your fixed monthly costs, such as your rent or mortgage, utilities, debt payments and transportation costs. Next, list variable expenses, like groceries, entertainment and dining out. Then, consider longer-term savings goals, such as retirement, an emergency fund or future vacations.

While the breakdown of your buckets will inevitably vary based on your personal situation, one key consideration is your time horizon. The optimal account or investment vehicle for each of your buckets depends largely on when you will – or might – need to access the funds.

If you’re planning for goals far in the future – like looking ahead to retirement during the early stages of your career or preparing for college expenses while your children are young – you’ll likely want to bucket the corresponding funds in long-term investments with a chance of growing over time. This often means sacrificing liquidity, or the ability to withdraw your money on short notice.

On the other hand, buckets that you may need to tap into relatively soon, like the funds you need to cover everyday expenses or emergencies, are better kept in more liquid assets like cash and cash equivalents. These assets typically provide lower returns but offer you peace of mind in knowing that your money will be there for you whenever necessary.

Making the most of your cash position

Fortunately, keeping your money in liquid assets does not require stashing a wad of cash under your mattress. There are plenty of ways to ensure that the financial buckets you may need to draw on in the near term continue working for you.

Optimizing the allocation of your opportunistic cash could mean seeking out high-yielding financial instruments. Depending on your liquidity requirements, you might choose to shop around for a high-yield savings account that pays an attractive rate but still allows you flexibility to withdraw your money as needed.

For funds you can commit to leaving untouched over a specific time frame, you might opt for a certificate of deposit (CD) account. These products often provide higher yields than traditional savings accounts, and CDs let you lock in these attractive returns for a specific time frame. But beware that you could be on the hook for an early withdrawal penalty if you take money out before the end of your CD term.

Money market accounts are another option for allocating your cash buckets. These accounts also generally offer higher returns than typical savings accounts, and they may allow you to write checks or make purchases using a debit card.

Money market funds, on the other hand – which are different from money market accounts – are a type of mutual fund that can offer short-term investing returns and pose lower risk than other vehicles. They come in three main forms: government, municipal and prime.

T-bills – or Treasury bonds – are another option when designating your cash buckets. T-bills are short-term securities backed by the U.S. Department of Treasury. Given their backing, they are considered a safe investment with potential for yield depending on the current environment.

All these aforementioned account types – excluding money market funds and T-bills – are secured by federal deposit insurance, protecting up to $250,000 worth of your funds, even if the institution where you hold your account fails or experiences a significant adverse incident.

Staying primed for your next big investment

While the cash portions of your bucketing strategy are essential for covering near-term costs, there is another advantage to holding funds in liquid assets. When an attractive new investment opportunity comes along, you will have the capital available to jump right in without dipping into other buckets you’ve earmarked for longer-term goals.

In the investing world, you may hear this type of cash bucket referred to as “dry powder” – the easily accessible assets you have on hand to deploy when emergencies or opportunities strike.

Bottom line

Bucket budgeting means separating your money into different categories designed to fulfill certain purposes. You may want to bucket any funds you need to access in the near term in cash or other liquid accounts. Luckily, high-yield savings accounts and other deposit products allow you to earn yield on your cash buckets, earning a return even as your money remains easily accessible.

If you have questions about applying the bucketing strategy to your financial life or making the most of your cash position, a J.P. Morgan advisor can help.

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