Financial planning is an important part of building financial freedom. It involves making wise decisions about your money and investing it in different time horizons, such as short-term, mid-term, and long-term investments. By separating funds into different buckets of investments based on time horizons, you can ensure that your money works for you in every stage of life.

Here are the Four Buckets of Money you can plan for (you could adjust the timelines based on your own unique situation and needs):

#1 Bucket: Emergency fund 

An emergency fund, also known as a rainy day fund, can provide you with the peace of mind that you are prepared for any financial situation. It can be used to pay for medical bills, car repairs, or any other unexpected costs that may arise. Moreover, it will give you the security to know that if your income suddenly drops due to job loss or other circumstances, you have money set aside to help get through it.

Having an emergency fund is one of the most important aspects of personal finance. It is a financial safety net that can help you cover unexpected expenses and weather through economic downturns such as recessions.

It is widely recommended to have enough savings to cover at least 3 to 6 months of living expenses in order to prepare for any potential rainy day scenarios. Therefore, an emergency fund is your first bucket of money to set aside and you want to keep it rather liquid by storing it in a high-yield savings account or some other liquid accounts.

#2 Bucket: Money for the next 6-12 months

The second bucket of money to consider is your living expenses for the foreseeable future – it could be 3, 6, or 9 months, depending on your comfort level and time horizons. You would want to give yourself a peace of mind that you are able to cover your living expenses especially during a volatile economy.

The key is to create a budget that is tailored to your needs. This means taking into account all of your living expenses for the next months, as well as potential investments you may want to make in the near future. Once this budget is set, it’s important to stick to it. 

With the right approach, you can ensure that you have enough money to cover your living expenses while also investing in the short term. Some of the short-term investments include CDs, high-yield savings accounts, short-term corporate and government bond funds, money market funds, treasuries and cash management accounts. 

#3 Bucket: Money for the next 2-5 years

Do you expect to have any major purchases for the next 2-5 years? Such as submitting a down payment for a house, purchasing a car, having a wedding or planning to have a child? Make sure you consider these significant expenditures into your financial plan.

Having these major expenditures in mind, you now want to manage and invest for the mid term. Given the longer time span, you have more creativity on how to allocate and invest the money. Consider investing in ETFs, dividend stocks and some fixed-income instruments as long as you are comfortable with the associated risks of these investments. But do be cautious that during uncertain economic times, some asset classes might lose you money – consult your wealth management advisor to choose the right products with acceptable risks.

#4 Bucket: Money for long-term investments (10-15+ years)

The final but probably the most important bucket of money is for long-term investing. Investing for the long term is a great way to build financial freedom. It allows you to take advantage of compounding, which is the process of earning returns on both your original investment and on returns you received previously.

Warren Buffett, one of the most successful investors of all time, is a huge proponent of long-term investing and has been investing for more than 80 years. 

Long-term investing certainly requires patience and discipline, but it can lead to significant returns over the course of years or decades. By taking a long-term view on your investments, you can benefit from stock appreciation as well as dividend payments. With a long-term strategy, you might look into stocks, real estate and other asset classes that tend to appreciate over time.

It is not about timing the market; it is about the time in the market.

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.

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