Saving 'by the bucket' is low-tech, but it works

April 05, 1992|By Jonathan Lansner | Jonathan Lansner,Orange County Register

Maggie Caruso saves money like clockwork.

Each month, about $900 is taken out of her paycheck for retirement. An additional $300 goes toward a fund to help her through the summer, when teachers don't get paid, and $500 goes for a vacation and Christmas gifts.

It's low-tech, goal-oriented financial planning, sometimes dubbed saving by the "bucket." And for Ms. Caruso, 54, of Huntington Beach, Calif., and her husband, Gil, 62, a retired salesman, it works.

"If you get it, you spend it," Ms. Caruso said.

Financial advisers and money management firms are finding that, increasingly, people want to be like the Carusos.

Although marketing campaigns offer overall financial solutions, more investors are taking a bucket-by-bucket approach to savings to reach specific money goals.

At New York-based Shearson Lehman Bros., investors are choosing goal-specific plans -- usually for retirement or schooling -- over more complex, comprehensive programs by more than a 20-to-1 margin. Mutual-funds marketer Fidelity Investments of Boston saw the college-savings segment of its business triple last year.

"We've got more sober investors today -- they're facing some very large costs for some very basic needs," Fidelity's Kathryn Hopkins said. "There's a lot of scary news out there, and people are trying to meet some of these basic personal goals."

Bucket saving is nothing new. Three decades ago, bankers offered passbooks with cover pictures of homes, autos and vacation spots. Savers chose a passbook to set a mental picture of their investment goals.

And for generations, the typical life cycle usually inspired bucket-style savings habits. Marriage brought the need to save for a home, next for rearing children and then for retirement.

But a changing world has crystallized bucket savings in many investors' minds.

At work, the traditional pension is being replaced by plans such as the 401(k) that put the bulk of the financial and strategic burdens of retirement planning on the employee. At home, surging college costs have made the education bucket a necessity.

"People want things simple," said Jann Nichols, a Costa Mesa, Calif., financial planner.

Bucket savings also can be a budgeting device.

Take a financial need -- debt reduction, vacation, a home or car down payment, or retirement -- and estimate its cost. Next, knock the figure down to the monthly or annual contribution needed to reach the goal.

The final number may be numbing, but experts say the "sticker shock" often is motivation to put a savings plan in place.

When choosing savings buckets, experts advise, start with an emergency fund that protects a household against loss of income from the shaky economy, medical setbacks or unexpected expenses such as for car repairs or a needed appliance.

A common figure discussed is three to six months' take-home pay, but each saver's situation likely is different.

Compound interest plays a big role in saving by the bucket.

The earlier a saver gets started, the more time interest has to work its wealth-building magic. This is particularly true in long-term investment scenarios, such as college or retirement savings. For example, it would take $224 a month to save $20,000 in six years, assuming a 7 percent return. In contrast, it takes only $46 a month to do it in 18 years.

Some financial planners cringe at the thought of patchwork savings. The typical comprehensive financial plan offered to individuals is designed to meet the bulk of personal savings needs.

But other planners believe small steps such as bucket savings are better than none.

"Traditional financial planning is perceived to be cumbersome and complicated," said Shelley Freeman, head of Shearson's financial-planning services. "When you bite things off in small pieces, though, it's not that complicated."

Bucket savings also can help savers with asset allocation -- the mix of stocks, bonds, real estate, cash and other investments.

Many experts suggest that investors match their investment risks to the time they can afford to let a sum of money sit in an investment. The shorter the period, those experts say, the less risk should be taken. For longer-term investments, more risk may be appropriate.

This often is at odds with investors' desire to keep long-term savings such as those for college or retirement in safe havens. But money-management firms argue that history shows volatile investments such as stocks aren't as risky as they appear.

By tailoring one's risk exposure to the length of time the money will sit in a specific bucket -- and sticking to it -- a saver may find asset allocation more to his liking than a mix dreamed up by a computer or Wall Street hotshot, some experts say.

A 35-year-old investor's retirement portfolio "has got time on its side. If I underperform [stock-market benchmarks] for any length of time, I'd be dead. I've got to be more conservative," said Baltimore money manager Richard Fontaine, known for his quick moves in and out of stocks.

"If you got 18 years to work with, stocks are fine, as long as you're willing to ride them down once in a while."

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