Thinking About Your Money in Terms of “Buckets”
“There’s a hole in my bucket, dear Liza, dear Liza”
"There's a Hole in My Bucket" is a children's song, based on a dialogue between two characters, called Henry and Liza, about a leaky bucket. The song describes a deadlock situation: Henry has a leaky bucket, and Liza tells him to repair it. But to fix the leaky bucket, he needs straw. To cut the straw, he needs an axe. To sharpen the axe, he needs to wet the sharpening stone. To wet the stone, he needs water. However, when Henry asks how to get the water, Liza's answer is "in a bucket". It is implied that only the leaky bucket is available, which, if it could carry water, would need no repairing in the first place. (source: https://en.wikipedia.org/wiki/There%27s_a_Hole_in_My_Bucket)
This song (through the lens of a Financial Advisor) can serve as a metaphor for dealing with debt, it’s hard to get ahead financially (fill your bucket) when your bucket keeps leaking. It can seem as though you are in an endless cycle of debt repayment and can be paralyzed by the inability to move forward and break-free.
If you are feeling overwhelmed with all the things you “should be doing” with your money it may help to separate all the things you “have to do” and organize them into three separate buckets.
Bucket #1 is Yesterday’s Bucket – it is all your debt from past expenses
Bucket #2 is Today's Bucket – your current checking/savings and upcoming expenses
Bucket #3 is the Tomorrow/Future Bucket – your long-term savings and future expenses
Without repairing the “hole” in the first bucket, you cannot begin to fill the second, and without filling the 2nd bucket you cannot move on to the third.
Bucket #1 is all your current debt, student loans, credit cards and lines of credit. You must first and foremost focus on getting out of debt before you can consider paying tomorrow’s expenses or putting money away. The only “investment” I would recommend at this time is if your employer matches contributions to a retirement or pension plan – other than that, your focus should be on eliminating those costly payments and interest. In this phase you must crack down and get aggressive about paying off that credit card or other bad debt. You have to put off making new purchases until these debts are taken care of. A great strategy is to tackle your smallest debt first, while continuing to pay your minimum payments on your other debts, once the smaller balance is paid off, start applying those payments towards your next largest debt, and so forth and so on. This is known as the “snowball” method of debt repayment.
Once bucket #1 has been taken care of, you may move on to bucket #2. This involves mapping out and taking care of immediate expenses and managing your cash flow. Try and minimize spending while maximizing earnings. Take care of all of your expenses for today and tomorrow so you don’t slip back into Bucket #1.
Finally, when you have filled buckets #1 & #2 you can begin to plan for your future and things that will happen 10-40 years down the road. Bucket #3 can be your “bucket list” – retiring when you want to and comfortably, traveling, switching careers, sending your children to University, etc. Everyone’s 3rd bucket will look different but a Financial Advisor can help you plan accordingly.
If you’re feeling overwhelmed by your leaky bucket or not sure how to begin to organize your finances I encourage you to speak to a Financial Advisor today.
Brooklyn Scott is a Financial Advisor/Mutual Funds Representative for Lewis & Jones Group/Desjardins Financial Group/Desjardins Financial Security Investments Inc. in Killarney, Manitoba.
Mutual funds are distributed through Desjardins Financial Security Investments Inc. For insurance products, Desjardins Financial Security Investments Inc. acts as a national insurance brokerage agency.