When seeking advice regarding our finances, 7/10 of us don’t always want to hear the financial jargon that goes along with it, but rather clear, concise, and straightforward explanations to what can often be difficult to grasp concepts.
Simplifying a concept doesn’t take away from its efficacy nor its capabilities to deliver – it simply lends to the area or topic that we are wanting to communicate when an overly complicated answer isn’t necessary. The use of long, fancy, even flowery words have their place, however, the best thing we can do is make sure the message is clearly presented, and above all – easily understood by the recipient.
This leads us on to a perfect example of how simplifying our methods can not only save valuable time but give the recipient’s ear a far more pleasurable experience, which in turn will keep their mind ‘present’ throughout the process. Eyes reminiscent of a deer in headlights is not the look we are aiming for.
Without further ado, let me introduce you to ‘The Bucket.’ Not literally of course – metaphorically.
Most, if not all clients will have assets that sit inside ‘A Financial Bucket.’
Inside your financial bucket will be anything that you are able to get your hands on within 7-10 days. Examples of this would be cash, investments and perhaps even stocks and shares that you might have accumulated over a period of time. What’s really important is, that we differentiate between what’s inside the financial bucket, and what sits outside of the financial bucket. If we think liquidity and a vehicle in which to hold that ‘liquid’ – then a bucket quickly becomes the obvious choice.
For most clients, their major asset which sits outside of the bucket is their home – it’s outside because it is equity that we can’t access in the short-term. The only time that you will get equity from your ‘bricks and mortar’ property is probably in later life when you decide to downsize. At that stage, money will flow into the financial bucket.
Other assets you will need to look at as far as financial planning is concerned; are any pension funds you may have accrued. Again, this sits outside the financial bucket, because the earliest we are able to draw on our pension benefits is at age 55 when the pension commencement lump sum becomes available as an option. Once released, this will then flow into the bucket: with the remainder providing an income for the duration of retirement. Perhaps the last of the big assets to add that are common with many clients, is their business. Which also sits outside the bucket.
In addition to the assets that you might have as part of your financial plan, you’ll also have an additional stream of income flowing into your bucket. This could be a salary from your employment, your own business, or any other forms of income you may have in the short-term. Looking a little further ahead, you will also have an entitlement to state pension when you come to retire, along with the elements of your private pension fund/s – which is also going to provide you with a regular income.
At this stage, the financial bucket looks pretty great, because all that is going to happen is, the money “level” inside the bucket is going to continue to rise. Unfortunately, as we all know… life’s not quite like that, and also because, on the side of our bucket – is a tap!
The tap represents our current lifestyle. Living expenses such as, putting food on the table, paying bills, mortgage/rent, car etc. All the things that cost you money right now. That level of expenditure will consistently continue until at some stage in the future – it stops. This tends to coincide with retirement, and at which stage, can be replaced by the second tap on the financial bucket.
I know what you’re thinking… two taps?
But this is not just any old bucket, remember. Experience shows that, for people who have adequately financially planned – expenditure can actually increase during the early years of retirement. Firstly, you are not at work 5-6 days a week – you’re at home doing the things you’ve been looking forward to doing your entire working life, and oftentimes that will mean spending copious amounts of money. And the only time that expenditure will finally stop is when we get to the ‘third’ tap on the bucket.
Now we have three taps? When is this going to end?
This is absolutely the final tap – I promise.
This tap represents the later years of retirement, and assuming that good health is kept, expenditure at this stage tends to reduce. The only time we will stop spending money altogether is upon death. And no matter what you’ve heard – you can’t take it with you.
If you are someone who has made little to no planning at all, the three taps will either be gushing fiercely or slowly dripping away over time – and before you realise it, you’ll be staring at the bottom of a bone dry and rusty old bucket – meaning you’ve run out of money, and not that there must have been a hole in it. It’s a good excuse – but it doesn’t hold water.
Another scenario would be, without understanding how all of these assets correlate and work together, it’s quite common to see buckets that are full to the brim when people die. But full to the brim is good, right? Well… actually there are two major problems with that.
The first is, that a huge chunk of that hard-earned money accumulated over a lifetime, could end up being given back to the government via inheritance tax. An even greater concern than that is, if you are in a position where you have managed to navigate the entirety of your life unscathed and made it to the golden retirement stage and your bucket is full to the point of overflowing – you may have failed to do one very important thing…
It’s not all about stocks and shares after all – but rather effective and long-term planning that will benefit and enhance the life you are living right now, during your working years, and right on through to your well-earned and financially secure retirement.