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A friend picked up Ray Lucia’s Buckets of Money at a seminar he gave a year or so ago and passed it on to me. I enjoyed reading the book but my first and immediate impression as I began to read it was that it was geared toward “older folks” who had already accumulated a sizeable nest egg and were closer to retirement (late 40’s and older).

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This book doesn’t offer advice on how to get your nest egg up to 300k nor does it have any “system” for stock picking or advice on trading nor does it tell you to “skip the latte” every morning; it is a strategy book on what to do with the nest egg you’ve already built up.

The strategy is fairly simple and straight forward. Ray advices the creation of three “buckets of money” to secure your financial future.

Bucket 1 contains money you need for on going expenses today
Bucket 2 contains money you will need in the immediate future once Bucket 1 runs out
Bucket 3 contains money you will need later in life (preferably retirement)

The strategy takes advantage of the time value of money and growth for Buckets 2 and 3.

I’ll break down an example of how I think the mechanics of this would work.

Say you need $2000/month to live on during your retirement years. In Bucket 1 you would put 24k into a money market account from which you will draw 2k for monthly expenses. You now know that this bucket will only last a year before it empties.

Meanwhile, in Bucket 2, you have 100k or so in a conservatively safe income producing investment. Whether high dividend yield fixed income securities of income funds and bonds, you keep the money safe but growing.

While Bucket 2 grows income, Bucket 3 is a little more aggressive and should yield higher returns and growth. Because the window for using Bucket 3 is far away, any “shocks” to the money bucket because of downturn in markets will be offset by the longer time horizon.

The mechanics are simple, as Bucket 1 empties; siphon another 24k from Bucket 2. This process repeats until Bucket 2 is empty at which point you draw funds from Bucket 3 and pour into Bucket 2 which then funds Bucket 1.

It is a simple effective way to manage your money. The only problem with this book is that is makes many assumptions such as:

  1. You have a large reserve of funds (300k +)
  2. You are an older individual close to retirement
  3. You will have fixed monthly expenditures

I’d love to see Ray Lucia come out with a book that focuses on the younger generation and longer time horizons but the book is a good read and I’d recommend it to everyone who would like to see effective long term financial planning theories and ideas from a veteran investor.