3 Money Buckets Required to Create Wealth

The 3 Money Buckets Required To Create Wealth

Tom Martin
Founder & CEO / Financial Planner

Too many people work far too hard, for far too long with little to show for it. The fact is, in order to live comfortably in today’s world you need financial security. You need these 3 money buckets, not just income.

Nobody chooses to live paycheck-to-paycheck. It leads to financial, even relationship problems. My heart aches to hear about families breaking up because of money.

The 3 Money Buckets isn’t just a recipe for creating wealth. Above all, it’s a recipe for creating a life filled with abundance, joy, and opportunities.

When you’re building a house, the foundation is the most important piece. I believe that if you build this foundation, then you’ll have taken a significant step toward designing a lifestyle you want. Whatever that looks like for you.

Here are 3 Money Buckets required to create wealth as well as abundance, joy, and opportunity in your life.

1. The Cash Bucket: Kicking Mayhem to the Curb

In 2010, Allstate Insurance Company launched its “Mayhem” video ad campaign. With some excellent acting from Dean Winters, who gave us a play-by-play to the devastation he was creating. Every single video was both devastating and humorous. It made an instant impact across America.

A little aside, in writing this piece I discovered that Winters also played an integral support role in John Wick (2014). See if you can find him 🙂

While the videos are hysterical, they’re also a good depiction as to what our lives can feel like without having appropriate safety nets in place. Your Cash Buckets are a safety net.

Starting out, I recommend that my clients set up three specific cash buckets. Fully funded, these cash buckets will provide a sense of security, allow you to go on debt-free vacations, and fund purchases you’ll need in a few years.
It’s important to note that these 3 Money Buckets are for everyone. The numbers I mention below are just recommended minimums.

Cash Bucket #1: Your Emergency Fund.

Your emergency fund is a cash cushion designed to help break a financial fall. Unfunded, we’ll be tempted to use our retirement accounts and resort to debt to fix financial shortfalls.

Dave Ramsey, an American author and radio show host, suggests building a minimum of $1,000 in your Emergency Fund. I agree. There should be a minimum of $1,000 in your Emergency Fund at all times, with the goal being to eventually cover 3-6 months worth of expenses.

Some people need there to be at least five to ten thousand dollars in their emergency fund to sleep at night. If that’s you, do that.

Regardless of your goal, you want to build this emergency fund as fast as possible. We don’t know when Mayhem is going to strike again.

Here are my rules for using an emergency fund:

Your Emergency Fund is to be used only for actual emergencies. This is an event that will prohibit you from working or something that will make your environment unsafe. Not having enough money to go on a last minute trip with your friends is not an emergency. Being short on money for the holidays is not an emergency.

It’s also crucial to no treat an emergency fund like an overflow account. Do not want to get comfortable taking money out of this account. When money is taken out (which should happen rarely), building it back up to minimum levels becomes Priority #1.

I recommend to use a Savings Account that’s separate from the account that I pay bills out of. It could be tempting to touch it. However, if you’re like me and don’t get tempted to touch this money, then by all means keep it where you’d like.

Cash Bucket #2: Your Vacation Fund.


Once your Emergency Fund reaches your minimum level, you can start directing money to a Vacation Fund.

I can’t believe I have to say this. We need to take vacations to reset. We need to leave behind work, as well as our responsibilities and obligations. While vacations are fun, it is proven that they can also save your life.

An article from Healthnet reports:

“A host of studies have highlighted the potential cardiovascular-health benefits of taking a vacation.”

In addition to reducing the risk of heart disease, studies have also showed that vacationing also leads leads to

  • decreased depression
  • less stress
  • improved productivity

One study revealed that those who failed to take  annual vacations were 32 percent more likely to die of a heart attack.

Through financial planning, I get to see my clients take that first debt-free vacation. It’s an amazing experience to me as a financial planner. While being financial responsible is important, no amount of money can substitute the value of life experiences, especially with loved ones.


Personally, I save for vacations a little differently than most people. I use a cash envelope budget for vacations and travel. Owning a few businesses, my income can be unreliable. While I make my best efforts to prepay my estimated tax bill every year, some years come as a surprise.

No matter what happens, I know that I have that vacation pre-paid by using my cash envelope. It also provides spending money and it’s impossible to overspend.

Whatever your method, I recommend a starting budget of saving $166 per month, or $88 bi-weekly. Schedule an automatic transfer out of your checking account into this bank account called Vacation Fund. In twelve months, you’ll have just over $2,000 saved.

Use your Vacation Fund for one big trip or several smaller trips. I recommend getting away every 90 days, whether it’s a stay-cation or somewhere within driving distance. You’ll lead a longer, happier life.

Fact: The majority of people don’t use all their paid time off (Vacation time). Over a billion dollars worth of vacation benefits are erased every year.

Cash Bucket #3: Your Goals & Hobbies Fund.

After you’ve set up the Emergency Fund and Vacation Fund, you can start tucking away money to fund personal goals and hobbies. If nothing comes to mind, one thing we should all be saving for in this account is for a down payment on our next car.

Other than that, this money is for hobbies that make you feel good about yourself. For me, that’s golfing and camping with my boys.

I keep this money in cash and in an envelope titled “Golfing” or “Camping.” Money goes fast when you spend it on things you like to do. Having cash on hand means that I’ll have the money and won’t overspend.

This fund is optional in the beginning. I’m sure you have more important places to direct your money than funding habits and hobbies in the early stages of saving.

3 Money Buckets Required to Create Wealth

2. The Retirement Bucket: To Slow Down One Day If You Want

My philosophy for life is to enjoy today life today, while also planning for tomorrow. You enjoy life today by making sure your Cash Buckets are in place. Retirement accounts are not a fallback emergency fund.

Say it with me, “I will not rob my retirement.”

The Retirement Bucket consists of all your retirement accounts. You could have several different types of accounts in your retirement bucket: 401(k), Roth 401(k), IRA, Roth IRA, 403(b), 457, SEP, SIMPLE, etc. There’s too many, and each one has different contribution limits.

How much you should save in your Retirement Bucket will vary by how much you already have saved and your age. I recommend saving 15 percent of your gross household income toward retirement.

Work your way up to 15 percent

If you’re not saving enough, don’t stress. It’s easy to increase your savings. You can increase your contribution amount by contacting your human resources department. To get up to 15 percent, increase your contributions by 2 percent month-over-month until you reach 15 percent. You probably won’t even notice it because it’s taken out before taxes. This means there’s less money to tax, so you won’t notice it as much.

I find that it’s best to have a few different types of retirement accounts. They all work a little differently and offer different types of tax advantages. For example, the money you tuck away in your 401(k) or IRA is not taxed when it gets taken out of your paycheck. You get taxed in the year that you withdraw the money from the account. This allows you to be more strategic with your money as it lowers your income today.

For the lawyers and doctors we work with, that’s good because it also lowers their student loan payments each month. You’re also deferring the payment of taxes to a year where you’ll pay less in taxes: retirement.

Roth Retirement Accounts

The Roth IRA or Roth 401(k) works differently. You contribute money to these accounts after tax. Since you’ve already paid taxes on the contribution and as long as you follow the IRS rules, the money grows tax-free and can be withdrawn 100 percent tax-free. When you start to draw income from your Retirement Buckets in the future, you can take money out of your IRA and Roth accounts to keep taxes lower.

Your Retirement Bucket is important to build up. It will take years and years of saving in this bucket for it to reach a critical mass. However, when it happens, the interest you earn from this bucket may be able to pay for your day to day living expenses, transportation, and entertainment without tapping into the principal balance.

Better thinking. Better habits. Better money.

Tell me where to send my best ideas, tools, and resources designed to help you build wealth that I don’t share anywhere else on social media.

3. The Dream Bucket: Where cool things happen

The Dream Bucket is where cool things start to happen. The Dream Bucket is money for a down payment on a home. It’s money for your children’s education, starting a business, saving animals, and stopping human trafficking.

Dream Bucket money can changes lives.

Dream Buckets can change lives. However, don’t work on your Dream Bucket without getting your other buckets together. You’ll end up withdrawing money from your dreams to cover the damage left by Mayhem.

To say this takes an emotional toll is an understatement.

The Dream Bucket is designed for growth

The Dream Bucket is a retail brokerage account. It’s not a retirement account, so you can use the money whenever you want. There’s usually no fee to open a brokerage account.

I don’t typically introduce the Dream Bucket until year two with my clients. It’s not uncommon for people to experience a little “two steps forward, one step back” in that first year. Investing too early can cause you to liquidate investments prematurely, causing fees.

Dream Buckets can be for individuals or joint accounts. When you’re ready for the money, the investments can be “liquidated” with a check mailed to the address on file (or wired to the designated bank account).

Open your Dream Bucket

At Clear Path Financial Planning, we offer full-service brokerage accounts and handle all the trading and portfolio maintenance. In other words, you don’t have to do anything. Alternatively, you can also open your dream buckets through online discount brokers. These are self-service companies where you need to make all the investment decisions and pay a fees for the transaction.

It doesn’t matter whether you utilize a full-service investment management firm or direct trades yourself through a discount broker. The most important thing is to invest consistently.

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