Episode 11: Why Your Money Buckets Might Be Keeping You Stuck

Today, I want to talk with you about something I do all the time in financial planning, but something I think can also work against us: money buckets.

You might also know this as the envelope approach, where you designate an envelope for each category you want to track, such as your mortgage, food, student loans, or school tuition.

So maybe every month you put a certain amount of money into your checking account for spending and bills. You contribute to your 401(k) or brokerage account for the future, and you keep some cash set aside for emergencies. Maybe you have another savings account for travel, a home renovation, or some other goal.

Generally speaking, I think this is a really useful way to organize and think about money. I use money buckets with clients all the time. They give us clarity. They help us understand what we can spend, what we’re saving for, and whether we’re actually following the plan we’re working toward. But sometimes that same structure that helps us make better financial decisions can also keep us from making the financial decisions we actually want to make.

The problem isn’t the buckets themselves. The problem is when we start treating the label we’ve put on the money as a constraint. We start saying things like, “That’s my retirement money. I can never touch it until I retire,” or, “That’s my emergency fund. I don’t want to spend it in case there’s an emergency.” The rules can become so inflexible that we struggle to give ourselves permission to change them.

But money is fundamentally fungible. That doesn’t mean every bucket is financially identical, or that there aren’t trade-offs or different tax consequences to moving money around. What I mean is that the purpose we’ve assigned to the money isn’t permanent. We made that decision, and we’re allowed to reconsider it.

Let me give you a personal example.

Some time ago, I was doing some work on my home, and we were thinking about how we were going to pay for the repairs and renovations. In my mind, there were basically two choices: we could borrow money, or we could use some money we had invested for our future selves.

Almost automatically, I found myself thinking that we should never touch the invested money. Not because borrowing was clearly the better financial decision, but because that money had already been labeled in my head as something for our future selves. And I caught myself thinking, “Why am I being so rigid about this?” If we used some of that money, would it materially change our long-term financial security? No. Would we have a little less invested for the future? Sure. But would changing the purpose of some of that money meaningfully hurt our larger plan? In this case, it wouldn’t. I see clients limit themselves in similar ways all the time, especially with emergency funds.

Someone may have carefully saved plenty of cash in case they lose their job or have an unexpected expense, which is exactly what the fund is for. But then they don’t want to touch it, even when an emergency actually happens. They look at the balance going down and feel like they’re doing something wrong. I remind clients that spending from an emergency fund during an emergency isn’t a sign that the plan is failing. It’s a sign that the plan is actually working. You had money set aside for exactly that purpose.

There are so many different seasons to life, and your money should be flexible enough to move through those seasons. And that’s where I think traditional financial planning can sometimes emphasize the wrong thing.

We’re very focused on how much we should have for retirement, how much we should keep in an emergency fund, and how much we should be saving every year. And yes, those are useful questions when we’re dealing with numbers. But before getting into the nuts and bolts of a financial plan, I think it’s also useful to ask a more purposeful question:

What is this money actually for?

Imagine someone who’s done an amazing job saving for retirement. They’ve done well financially in their current career, but they’re miserable, and they want to do something different. Something they might actually love.

Changing careers might mean taking a year off, going back to school, or taking a pay cut. And let’s say all of those things are possible if they spend forty or fifty thousand dollars of what they’ve already saved.

If doing that doesn’t materially jeopardize their financial security, is preserving every dollar in that retirement bucket really the best financial decision? Or might that money have a much bigger impact when they’re forty-five and contemplating a major life change than it does when they’re seventy-five? It might allow someone to build a career they actually want to continue doing for another twenty years instead of feeling burned out.

And that’s where I think we have to be careful about confusing saving money with using money well. Ask yourself: what if using some of what’s in that bucket made your life better today and in the future?

Is the amount I’m continuing to put into these buckets meaningfully improving my life and my financial security? Or is there something I’m not allowing myself to do because I’ve made the structure of the plan more important than what I actually want?  I think those questions are worth asking, because a good financial plan shouldn’t require you to limit yourself all the time. Money buckets are really useful. But they should be guideposts. They shouldn’t be making your life decisions for you.

Thanks for joining me today, and I’ll see you in the next episode.

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