Balance these 4 buckets of MONEY AND your financeS will be healthy & WORRY-FREE
How do you rate your financial health? Are you happy and carefree regarding money, or are you extremely worried?
Do you get emotional about money, say when it comes to a massive drop in the price of some stocks you hold, do you get upset and unsure if you should sell them low or buy more to average the unit cost?
If that is you, you might need a system to help - one that is not emotionally attached but will work towards stable monetary growth… and move your money status towards the “care-free” rating. I suggest you go through this simple exercise of drawing out your own “4 Buckets of Gold” to have a birdseye view of your assets before discussing the investment or retirement plans with your financial consultant.
4 Buckets of Gold
There are many different kinds of assets, but they can all be categorized into four buckets of wealth:
Emergency Cash
Protections
Steady Income Combo
Long-term Growth Combo
Illustration of “4 Buckets of Gold in Life”
benefits
Before we dive into the details of each bucket, let’s discuss why we should categorize our assets like that. A good balance of these buckets will:
let you track your assets overview easily
minimize sudden large expenses
give you clarity in assets that are playing the “attack” and “defence” roles, so that you or your financial adviser can implement holistic strategies for a balanced portfolio
balance out the extreme effects of investments with the highest risks or lowest returns
help you grow your wealth steadily (with regular review and adjustments) without panicking about the daily rise and fall of stocks or fund prices
be on a solid basis to kickstart your happy retirement passive-income planning with ease
EXPENSE MANAGEMENT
If you’re still reading now, you might have some money questions that need to be solved. I suggest you draw the 4 boxes on paper and list what you have on hand to gain more clarity.
The top two buckets, “Emergency Cash” and “Protections” are for expense management. For a working-class employee with a stable job, I recommend keeping 6 months of emergency cash in your bank account in case of any urgent needs. Why not more? Because any amount more than that might mean a loss of opportunity for monetary growth. Based on historical data, putting money in banks with single interest couldn’t beat inflation. So that means this amount in banks is going to diminish over time.
Protection-based insurance products are under the expense management category because they “save our asses” in case things happen, e.g. death, sickness, unable to work, etc. Note the minimum amount of benefits should be:
Life insurance: minimum benefits should cover the total amount of your unpaid loans and remaining dependants' expenses (e.g. kids' education costs and/or monthly cash supports for parents x no. of years unpaid) as these expenses might be transferred to your spouse or family members in case of your death. This is to protect them and leave them a blessing.
Medical insurance: the claim amount goes directly to the hospitals and medical centres based on the invoices. For the best expense management result, the minimum benefits should cover the costs of the most expensive critical illness treatments, the most common being cancer (terms should include full coverage of most cancer treatments, e.g. chemotherapy, radiotherapy, etc). So based on historical data, this should be at least HK$5M. A good choice is VHIS with the highest coverage, which is also tax-deductible.
Critical Illness insurance: different from medical insurance, the benefit of critical illness insurance is to replace your income if you decide not to work due to critical illness. This amount goes directly to your bank account, instead of paying for the medical invoices. The minimum benefits should be your yearly income x 3 years to cover your kids' education, rent or mortgage expenses, etc which will not stop simply because you are sick and not able to work (most serious sicknesses, such as cancer, will take at least 3 years to recover).
As a general rule of thumb, we suggest using 10-15% of our monthly income as a total budget for these protection products - to protect 90% of our assets. But this amount might differ from case to case.
Income Management
The bottom two buckets, “Steady Income Combo” and “Long-term Growth Combo” cater for steady income. Steady Income Combo includes any investments that give you dividends, such as:
Coupons or bonds
Annuity (tax-deductible or non-tax-deductible ones)
Rental income
Dividends
And Long-term Growth Combo includes any investments kept for at least 10 years, a minimum of one economic cycle, but without dividends, such as:
MPF/ORSO
Stocks
Funds (without dividends)
Savings insurance products
Premium financing (with insurance savings)
Properties (not for rental income)
Note we are not discussing short-term investments here as they don’t generate steady income growth.
Healthy Proportions
Now that you know where your assets go under these buckets, let’s see how well you are doing on the allocations. A healthy allocation in the “Incoming Wealth Management” section would be something like this:
Steady Income Combo: Your total assets x (your age)%
Long-term Growth Combo: Your total assets x (100 - your age)%
EXAMPLE: 35 years old female Marketing Manager working at an MNC, monthly income HK$60,000. Other assets include:
Cash in bank: $500,000
Steady Income Combo ($260,000):
Bonds HK$100,000
Annuity HK$60,000
Funds with dividends HK$100,000
Long-term Growth Combo ($700,000):
MPF HK$300,000
Stocks HK$300,000
Savings insurance HK$100,000
The healthy allocation calculation:
Emergency Cash = $60,000 x 6 months = $360,000
Protections budget = $60,000 x 15% = $9000/month
Steady Income Combo = (Cash in bank + other investment assets) x 35% = ($500,000 + $960,000)x 35% = $511,000
Long-term Growth Combo = (Cash in bank + other investment assets) x 65% = ($500,000 + $960,000)x 65% = $949,000
WHERE TO START
Imagine we are on a ship - do we build the base first or the top first? We always have to rely on a solid base before building upwards. Can you imagine what would happen when the body of the boat is leaking while we build more layers on top? The more layers we build, the heavier the boat, and the faster it will sink if we don’t mend those holes.
This is the same logic in our finances - we manage our expenses first before building up the incoming wealth buckets. If we earn a lot without sufficient protection, we might not be able to accumulate any wealth, and in some cases, there might be huge losses. So make sure your boat is damage-free!
This is the very first step to happy and carefree retirement planning. Make sure you have a holistic annual review on this so your buckets won’t get off-balanced. If you wish to have a tailored review and professional advice, I will be happy to have an initial chat with you (English/Cantonese). Book a 30mins consultation (free) via this link.
