The 3-Bucket System: Spending, Flexibility, Freedom.

Mastering Financial Clarity with The Three Bucket System (Plus One!)

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner and founder of Palm Valley Wealth Management, discusses the importance of having a clear financial purpose and introduces a framework called the 'Three Bucket System' with an additional bonus 'Legacy Bucket.' Hunter explains how to categorize your money into spending, flexibility, and freedom (retirement) buckets, and adds a fourth bucket for legacy. The episode covers the roles and purposes of each bucket, common mistakes high-income earners make, and how to balance and fund these buckets to achieve financial clarity, confidence, and calm. Listeners are encouraged to focus on the purpose of their money rather than just the tax treatment of their accounts. Hunter also provides a self-assessment exercise to help listeners evaluate their current bucket allocations. The episode emphasizes the importance of aligning financial decisions with personal goals and values.

00:00 Welcome to The Retire Early Retire Now Podcast
00:33 Understanding Financial Stress and Purpose
01:55 Introducing the Three Bucket System
05:09 Bucket One: Spending and Cash Flow
07:47 Bucket Two: Flexibility and Options
10:32 Bucket Three: Long-Term Freedom
12:42 Bonus Bucket: Legacy Planning
14:50 Integrating the Buckets for Financial Balance
17:16 Self-Assessment and Final Thoughts
19:56 Conclusion and Call to Action

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast, a show where we help high income earners. Stop guessing, stop stressing, and start using money as a tool to live better now and in the future. If you're new here, my name is Hunter Kelly. I'm a certified financial planner and founder of Palm Valley Wealth Management. Over the last few episodes, we have talked about when saving more stops helping, what do those trade offs look like? Financial blind spots that creep in with success and how to know when you're saving enough without waiting for a magic number. And in today's episode is all about structure because here is something I've learned after years and years of working with high income earners. Most financial stress is not caused by lack of income. It's not caused by lack of discipline. it is almost always caused by unclear purpose. If you think about, successful businesses, successful athletic teams, they all have one thing in common. Their. Organizations all have purpose. They all have roles, whether that is the lowest person on the totem pole, entry level employee or to the highest part of the organization, owner, of those organizations or businesses. They all have a role. They all have a purpose. And having a clear defined purpose or a clear defined goal, will help you. Not only in business and in life, but also with your money. And so most of these high income earners, they're doing all the right things. They're saving, they're investing, they're being responsible with their money, but their money just doesn't have a clearly defined job. And so that's what we're gonna talk about today. So when money doesn't have a job, everything feels like it competes, spinning, feels. Irresponsible. Saving never feels like enough. And so today I'm gonna walk you through a framework that I constantly work with on clients. It is the three bucket system, and I'm going to actually add in a fourth bucket. So wait until the end of the episode for that as well. And we're gonna show you how it brings you clarity, confidence, and calm to your financial life and how to structure that, and then give you some test on, Hey, how well are my buckets structured? Tune in and hopefully this will help you, give you a little bit more purpose to your money and how to organize that. but before we get started, go ahead and leave a five star review on your favorite podcast and app and please share this with a friend. It's helping this podcast grow and I am very appreciative to that. I want to help everybody, become financially independent or, retire early, whatever they choose, whether that be both or one or the other. let's hop in. Why buckets matter more than accounts. Okay. Everybody gets focused on these accounts. They focus on 4 0 1 Ks IRAs, brokerage savings, high yield savings. money markets, but accounts are just containers. They don't actually have purposes. They just have tax laws, right? So if you're in a 401k, you're getting deferred growth, maybe tax free, if it's a Roth version. If you're in a Roth, IRA, you have different rules and things of that nature. But what these accounts don't do is they don't ask or answer the most important question, and that is, what is this money actually supposed to be used for? What is the purpose of this money? The bucket system forces you to think. In terms of purpose and not of tax treatment, the more important part of your money is that purpose, right? Why are we working or why are we earning a paycheck every month, every two weeks, by whatever it is for you? Why are we earning this money? and what do we want to do with it? And then we let the accounts give you the best tax treatment, right? And so we can put those accounts in each bucket. the buckets answer when money is meant to be used. So what's like ti, what is the timeframe for this money? How is it going to support your life, and your goals and your purpose, and what you want to do with this money? And what role does it play in reducing stress? When people skip this step, it often ends up with overfunding, one area versus another, or vice versa, underfunding another area, and constantly second guessing your decisions, right? And so what I find, find in practice oftentimes, especially with high income earners. Their more long-term buckets are super filled. They're maxing out their 4 0 1 ks. They're, they're doing all the things retirement based. Maybe they have a good emergency fund, uh, but they don't have that flexibility. And I kind of talked about that, uh, there in the last couple e episodes as well. And so. They're gonna have, not their, their buckets aren't going to be properly balanced, if you will. Right. And so buckets don't reduce the discipline, they just give that discipline a direction, right? And so that's what we're talking about today. So we're gonna go over each bucket, right? And then we're gonna talk about how we should be filling those buckets based off of your. Goals and needs and purpose. So the first bucket again, is probably the most self-explanatory, but that is your spending or your cash bucket. This bucket is, the bucket that most people feel guilt around because ironically, and ironically, this is the bucket that most directly affects your quality or of life, right? This bucket supports your lifestyle, your day-to-day cash flow, your experiences, your convenience, and your enjoyment, right? This is your checking account where you're paying those bills, your, pulling. to pay for credit cards that you use your daily spending on and things of that nature. And so here's the mistake that I see. A lot of the time, people treat spending like the enemy, right? Especially if they've had problems with budgeting and things in the past. They see, they say things like, we can't afford it, but should we, let's wait a little bit longer. The problem isn't always necessarily spending. The problem is unintentional spending. So again, having these conversations, what are our goals? What are our purposes? What is this money supposed to be doing for us? Whether it's this week, this month, this year, the next couple years, whatever that may be. What is the role of this money? And so when spending is aligned with your values, that guilt of buying something that maybe you normally wouldn't buy, uh, will go away. Confidence increases and your decisions get easier, right? If you know your purpose with your, monthly spending is to be able to have, an extra three or$400 to go spend, on golfing or whatever your favorite hobby is. And you allocate that properly to your bucket, then it's going to be easy to make that decision and not feel guilty about it. now the hard part always is, especially if you're married, or have a spouse or some, a partner, whatever, it is difficult. it is a more complex, thing to get everybody on the same page, right? that's a whole nother that we could do a whole nother podcast series on that. but making sure that you're aligning those goals and everything with you, with your spouse as well. this bucket. Once it's properly filled, gives you permissions with guardrails, right? Obviously we won't, we don't want to go spend frivolously because there are probably other things that you want to do outside of this bucket, and that's what we'll talk about here in just a second. But it gives you that, that ability to enjoy the life that you're already living, right? So money is, money that never gets used becomes a source of stress instead of support. Bucket number two, this is where flexibility comes in. This is one thing that I talk about a lot, and you're probably, if you've been listening to this podcast for a while, you'll understand kind of where I'm going with this. But in this, this second bucket is meant for flexibility and this is where high income earners are. Intentionally underfunded. Right? So they're, they're, they just don't know what they don't know. Especially early on in their wealth accumulation life. flexibility is money that gives you option before traditional retirement age. So whether that's slowing down buying houses. Helping your kids out, starting a business, whatever that may be for you, right? This, what this bucket would include is extra cash reserves, right? because maybe there is a certain expense that you have that's coming up that you can't necessarily invest, you don't wanna take a risk on it, but it's extra cash outside of your month to month spending or emergency fund. taxable brokerage accounts. this is the big one that I talk about a lot. if, if there is a three to five or plus timeline, getting some money into a taxable brokerage account and properly investing that can do wonders, over your lifetime, right? And then making sure that those investments are obviously accessible. This bucket answers questions like, what if I want to slow down? What if I'm burnt out and I just want to go PRN at my job for a handful of years or for the rest of my career, whatever that may be. What if we want to make a change? What if my spouse wants to stop working to, to be with our kids more and help around the house, with sports and all the kids' activities and things of that nature? or explore another hobby that they may have. What if, an opportunity shows up and I wanna start a business or buy a business or, just change my career, for whatever reason, and it may not bring as much income in. And so these are the questions that this bucket can answer. And so I see this issue constantly with people that have done everything right. They've crushed their retirement savings, but their wealth is locked up behind all these age restrictions of 4 0 1 Ks, IRAs, so on and so on, right? So on paper they have a great, great net worth. They're, they're wealthy, right? But in real life, they're kind of constrained because of these silly penalties that they're surrounded with or, or, or you'll get from taking distributions from these retirement accounts. So having this middle bucket, this bucket number two for flexibility, can give you peace of mind, and it peace of mind is often more valuable than maximizing your returns, right? again, one of my favorite quotes is, if you beat the s and p by 2% every year, but you aren't able to retire, what does it matter anyways, right? bucket number three, freedom. All right, freedom. AKA retirement. This is going to be your more long-term investments, right? So this is where you would put your 4 0 1 Ks, your IRAs, Roth IRAs, four 50 sevens. 4 0 3 Bs, right? This bucket is all about long-term security, income replacement, not needing to work forever because as much as we think we can, most of us won't be able to work forever whether we choose to or not. And so this is where most people naturally focus. You think about Dave Ramsey, Susie Orman, all these financial gurus, they're really good at helping you pay down debt. They're really good at helping you getting started on funding retirement, and that's where, people stop, right? they don't think about the flexibility aspect of it and kind of taking it to the next level. And so I'm hoping I can be a person in that space to go, Hey, all these things that Dave Ramsey is talking about and the alike are talking about. that is great, but let's take it a step forward and start giving you some more flexibility or strategies to be more flexible within your life from a financial standpoint. So freedom without flexibility can be suffocating or feel suffocating, right? and if all of your effort is focus on a future date, life today feels tight, you can. Get burnout feels like something distant, right? we can all think about goals that are a ways out, right? And how difficult those can be. And having that flexibility bucket along with your freedom bucket can give you a little bit more hope, give you a little bit more peace of mind, give you a little bit more freedom or, breathing room to. Eventually hit those more long-term goals. So the goal isn't to neglect this bucket. It is to fund it appropriately and not obsessively. Freedom should be built alongside a life that you actually enjoy living, right? and so it's finding that fine balance between making sure I can retire at the age that I want to retire, but also, enjoying life now. that's what I'm all about here. And so here is the bonus bucket, right? I talk about the three bucket strategy all the time, but there is a fourth bucket that is often forgotten, that is important to people, and it has come up more and more as I've been working with more and more clients over the years. And that is, bucket number four for legacy. So this bucket gets, postponed, generally ignored till retirement, and rightfully so, right? You wanna make sure that you are. immediate needs are taken care of, and most people don't think about, passing away or giving a legacy until they're much older. but if it's something that is important to you, or you've gotten to a point where your wealth, says, Hey, I need to start thinking about this now, and. And so this can be a great way to start planning. So it's about values, generosity, meaning, and impact, whether that's impacting your immediate family, charities, whatever that may be. So you can include, helping your family, charitable, giving, face, faith giving. And then creating opportunities for others. So I'm thinking back to a media I just had with a client and Legacy looks different for different people and what they want to leave is a legacy, but just met with a client and she is wanting to help out her grandkids, right? Her grandkids are fairly young, not even five or six years old, and she wants to make sure that they have a down payment for her home. and Ability to essentially start a business or, or just get established in life, uh, once they turn 18. she is opening an account for them and she's going to fund it to a certain value and then let it grow until they're 18 and then decide what she wants to do with it. And so there's a couple of different ways that she can go about it. Currently we just have it in our brokerage account, in. The trust is the beneficiary and we will decide what to do with that money now. but you can get more complex with that, and that's just one situation of helping family. and again, you can do charitable giving through donor advised funds, faith-based giving, like giving to your church and things of that nature. if legacy's important to you, you could use that as your fourth bucket to properly allocate that, and fulfill those purposes and goals and things of that nature. so the real question is how did these. Buckets work together. This is the most important thing to understand because, the buckets are not meant to be equal, right? They're gonna shift over time. Early on your spending and your freedom accounts, or your freedom bucket. your retirement accounts are going to matter the most, right? And then as you, pay off debt, you start getting a little bit more income, things of that nature. You'll hit your mid-career and then you're gonna say, oh, I have kids. They're doing sports, they're doing, different hobbies and activities and things of that nature. I want more flexibility. Right? And so you're gonna want to have that flexibility bucket be funded, and ready to go. And then later in your career, obviously that freedom bucket comes back into play. And then legacy may take priority helping out kids, grandkids, churches, Whatever that may look like. So the biggest mistake I see is trying to max all four buckets at the same time and just think about bandwidth, right? do you have enough resources to fund all of these at the same time? Some may most don't, right? And so that's when, people feel stretched, they feel anxious, they're doing everything right, but really nothing feels good. Buckets are a way to force your awareness toward trade-offs. And we've talked about this, in the last few episodes, but trade-offs are important, right? And that's, that's what I think the crux of financial planning is. So understanding your buckets, what purpose they have. Knowing your resource, the amount of resources that you have, and then understanding those trade offs of if I fund this first, this bucket versus that bucket, what does that look like and what does that mean for me? Does that mean a later retirement or early retirement, or not being able to help out my kids as much, or not being able to spend as much now, or spending more now and trading off something for later. Right? Because most of us don't have infinite. Amounts of resources. We're not all Bill Gates or Elon Musk or, x, y, z, super rich person, right? Most of us, are at a point where we're doing well, right? We're, we are on kind of that, that upper echelon of income, but also, w. We don't have unlimited resources as well. And so how do we find that fine balance, that fine trade off to meet everything that we want to do and, and live a life that that makes us feel fulfilled and using money as that tool, right? And so here's a simple self-assessment to say hey. Am I funding these correctly or, are there some changes that I need to make? So here's a quick exercise. Ask yourself which bucket is overfunded. All right, are you over? funding your retirement bucket, like could, if you stayed at the same savings rate into your IRAs and 4 0 1 ks and things of that nature, are you gonna technically be able to retire way before, what you would actually want to retire? To me that says, Hey, we're overfunding that bucket. Where do I, am I sitting on hundreds of thousands of dollars of cash, that I can use for my monthly spending? Maybe that needs to be allocated to your flexibility or your freedom bucket, right? Or are there buckets that are underfunded? do I feel tight? Am I cash flow every month, but I'm overfunding my retirement? And so which bucket? Am I avoiding because it feels uncomfortable, right? am I spending too much? Like obviously that's the most, that's the most obvious bucket, right? I'm just spending too much and underfunding my savings. do I have too much in retirement? I'm just squeezing, every bit of cash flow I can out of that and not necessarily living now, but I would want to, right? And so the bucket. You avoid thinking about is usually the one creating the most friction in your life, right? If you think about it in these terms. And so how do we take steps, even if it's baby steps, to alleviate some of that friction, and make it aligned to our goals a little bit better? Right? And again. Starting out with understanding your purpose, understanding the job for the, the particular bucket and the money that you wanna put in that bucket, gives you that clarity up front. And then it's kind of easier to go about, okay, well what are the next steps to, uh, making sure that I'm meeting those goals and giving that dollar that job, right? There's no perfect allocation. It's only alignment. And this is where financial planning really gets, specific to each person, right? Not every single family, every single household is gonna look exactly the same, even if they have the same income, in generally the same expenses, they're gonna have different goals, wants, and needs, right? And so this is where a planner can really come in and. Help you allocate to the proper buckets, but then also work on other things like investment management, tax planning, all those sorts of things that come in with what you would think traditional financial planning would be. And so money isn't just about accumulation at some point. It becomes about ownership. Owning your time, owning your choices, owning your life, having that freedom. And so the three bucket system plus that legacy buck bucket doesn't just tell you what to do. It helps you see what you're already doing, whether and whether it matches with life that you want, and if you want help structuring those buckets in a way that supports your goals, your values. Exactly what you want outta life. That is what I do at Palm Valley Wealth Management. so you can go to my website if you're interested. Look at my, my process that I have developed. I call it the Palm Valley Pathway. And if it looks like something you're interested in, schedule a call with me. That first initial call, it's no cost. We can have a conversation about your situation. Would love to, to do that and see that. See if we could work together. if this episode helps you think differently about your money, I'd really appreciate it if you would take the time and leave a five star review on your favorite podcasting app and share this with a friend that you think would benefit from this episode. As always. This is educational. It is not meant to be financial or investment advice. Please do not make decisions solely based on this podcast alone. Please seek professional help when making decisions about your own situation. Thanks for living. Thanks for listening, and we'll see you next week. So when legacy is undefined, it becomes accidental. And when it's defined, money starts reflecting. Oh,