Leland Gross (00:00.718)
Hey everyone, welcome back to What Works Wednesday. I'm your host, Leland Gross. And today I want to talk to you guys about what I call a three bucket account structuring system. So this is a great tool that you can use either in your business or in your personal life to really make sure that your finances are structured in a way that every dollar is serving a purpose. Every dollar is growing efficiently and every dollar is tax efficient to its defined purpose.
So oftentimes when I come across people, they have all their money in their checking account, they have a checking account, a retirement account, and there's some confusion as far as am I setting myself up well? Do I have everything in the right place? Am I missing something? And having a three bucket system will really help you feel confident and have clarity over what money is where and what money is doing what to make sure that it's really
working for you and you're getting the best bang for your buck. You're getting every bit of value out of your accounts. So this is how the three bucket system works. So on a high level, you're going to have a short term bucket, a middle term bucket, and a long term bucket. Now, an analogy I like to use is coffee cups, coffee mugs. So there are different vehicles to carry coffee or tea that serve
different purposes. You've got your faithful old porcelain mug that is used for short -term bursts of hot liquid drinks. That was a weird way to say that. But with a porcelain mug, it's great, but it's short -term. It's not designed to keep your coffee warm. It will get cold pretty fast. It's not designed to travel with, although some people are psychopaths and they do.
drive with open porcelain mugs and that freaks me out because it's going to spill, it sloshes, but it's great for your short term, I'm going to be stationary at home or at your office, cup of coffee. Then you have your middle term, which I would call your cardboard Starbucks cup. It's on the go, you pick it up, it's got a lid so you can travel with it, you can walk with it. It's four out and about.
Leland Gross (02:23.95)
Again, it's probably not going to keep your drink hot for very long, but it's probably going to keep it hotter longer than like a porcelain mug, which will get cold really fast. So it's longer term. It's more travel worthy than the porcelain, but it's still not going to be hot forever or go with you forever. You're not going to reuse a paper mug or coffee cup. Then you have the faithful like Yeti, you know.
Thermos it's gonna keep it hot till you die like you I poured coffee two weeks ago and it's still scalding hot and it goes with me and I can reuse it as long as I want and it's old faithful of coffee mugs and that's gonna be my long -term ride -or -die car adventure whatever mug Now what's in each mug is different per person so you could have?
Black coffee, you could have cream, you could have a latte, you know, Americano, whatever you want it to be. That's up to the flavor you choose. So it's not as much what's in it as opposed to the purpose of the mug itself and the timeline of the mug. Each one kind of comes with its own features and we sort of subconsciously just choose the one for the features we need at that moment.
So that's the same with the account structuring. So your short -term bucket of money is going to be your porcelain mug. It's not designed to be long -term. It's not designed to be, I'm growing this money for retirement 30 years down the line. It's designed for today, for the quick short -term needs. So this would be your bank accounts, your checking account, your savings account, high interest savings account, maybe a short -term CD. With this account,
you have access to money with these vehicles. The short term bucket of money is the main goal is access. So if I need groceries or I'm stranded on the side of the road and need to call a tow truck, I have money. I can swipe a card and it's there. So we, this would be your emergency fund. And I say pretty much anything, you know, you're going to need money for in the next year. You're like, we're buying a car in six months or buying a house in six months. That should be in your short term bucket.
Leland Gross (04:43.15)
Now short -term buckets can grow a little bit. They can get interest like a high interest savings account, but they're not really designed to get you peak growth opportunity over the long haul. Over the long haul, other investments will do better than that. But this short -term bucket is going to be access and that's basically it. We're not really banking on growth other than maybe a little bit. And we're not banking on any sort of tax advantages. You're not getting like a tax break to save money into your checking account. So,
Bucket one, access. Pretty much everybody has this bucket. Just to survive in society, you kind of need it. Then if people have their short term, a lot of people also have their third bucket. So we're jumping in number three. This is your long term bucket. This is going to be the Yeti Thermos. Or for me, it's my Ouala water bottle. Keeps water cold for, you know, 10 years straight. It's like singlehandedly going to replenish the Arctic. And it is old faithful for travel.
So this is going to be your retirement accounts or your really long -term investment accounts. So 401ks, Roth IRAs, IRAs, all of these kind of fall under that long -term bucket. Now this bucket is the exact opposite of the short -term. The features are totally the opposite of each other, where with long -term money, you, nine times out of 10, can't access the money, right? Like a retirement account.
I have to wait till I'm a certain age before I can access the money. But inside this account, I get major growth. I can choose to invest as aggressively as possible. We're doing the crazy ups and downs of the market. But the goal is long term maximum growth of money. And I get maximum tax efficiency here. So if it's a pre -tax account like a traditional IRA or 401k,
I get a tax break this year for every dollar I put in there. So if I put in $10 ,000, $5 ,000, I get a $10 ,000 or $5 ,000 tax deduction for doing that. Or it's a Roth where I don't get anything special for putting money in now, but that peak growth I was just talking about, I get that tax free later. Both are great options and opportunities for you. So with the long -term bucket, no access or access that's
Leland Gross (07:06.078)
restricted to a specific event like an age or situation. But I get peak growth and peak tax efficiency. So almost everybody has bucket number one. Most people have bucket number buckets one and three. But surprisingly, very few people have bucket number two, which I would consider your middle term bucket. That Starbucks cup. The goal of this account.
is sort of a hybrid where I can grow my money. I can invest it. I would probably choose a less aggressive investment model in case I need the money. So it'll probably grow, but not always as much as your long -term bucket. But I also have access like the short -term bucket. If I need the money, I can get it. Now it's not tied to a debit card. So it might take a few days to, you know, sell shares of investments, turn it into cash and transfer it to my bank account.
but there's no penalties for accessing it. So I can pull it out should I need to, you know, buy a new car or renovate a kitchen or do anything that I want to do with that money. So with this middle bucket, you have access like your short -term bucket. You have growth like the long -term bucket, but you don't have tax benefits. See, buckets two and three are different types of investment accounts.
But when it comes to investing in the account you choose, we're on a seesaw where if you have a tax break, you do not have access or the access is restricted. So 529 plans for college. You get a tax break, you grow that money tax free, but you have to access it for college. Retirement accounts, you get tax breaks, but you have to wait until a certain age to access it. So if you have tax benefits, you do not have access.
and then flip the seesaw. If you have access, you don't have tax benefits. And that's that middle bucket. And the reason you want to have all three is because you want to be funding your long -term bucket always. But you don't want to overfund it because what if you want to retire earlier? What if you need that money sooner than retirement? But you also don't want to just fund your short -term bucket because it's not growing. So eventually once you have more than your emergency fund and one -year needs, well,
Leland Gross (09:33.112)
anything else in there that you're putting in there is losing pace to inflation, most likely, or it's not growing. You're not building your wealth. Your money's not working for you the same way. So with that middle bucket, you're able to continue to grow your wealth. You're able to continue to make money work for you beyond that of your emergency fund. And you have access beyond that of your retirement account. It's a great tool to have. Now, again, these are just the accounts. Once you open the accounts,
You have to fill them. And that's a really common mistake I see people make is they open up a Roth IRA, they're putting money in, they're funding it. And they're like, why is this not growing? Well, then we look at it and there's nothing in there. They never actually purchased investments. So they have the Yeti Thermos ready to go. They opened the Yeti Thermos, but they never put the coffee in. They never actually funded the account and purchased the investments to actually make it grow. And that's really important.
See, we're used to checking accounts in the short -term bucket where we just put money in and because it doesn't grow, all it holds is cash. So now that's all we do. But with your second and third buckets, once you open them, they have these built -in features like the Starbucks cup, like the Yeti Thermos, but now we actually have to purchase the investments inside them to make it fulfill its full function. So short -term, mid -term, long -term, we have your emergency fund and your cash for your short -term needs.
We have your brokerage account assets that are going to grow, but you have access to and don't get a tax break. And then we have your long -term, which is your retirement accounts. You get a lot of growth in them. You get a lot of tax benefits in them. They're great, but you can't access them until a certain age. So I hope that helps. If you're sitting there and you're like, I have one of these buckets or two of these buckets, but I don't have all three, make sure to get that set up or reach out for help. And with that, go forth, create the life you want and prosper.