My chief definite purpose in life is to live the good life AND build generational wealth with a family governance system to perpetuate it. And along the way, help others do the same.
However, my journey into frugality, as shared in my “Smart Frugal” article, highlights my struggle with saving excessively, often compromising today’s quality of life for future security.
To address this, I’ve crafted a system for managing and allocating funds, called “The Five Buckets of Capital.”
The First Bucket: Current Expenses (Working Capital)
This initial bucket is all about handling daily costs and saving for the near future. It covers necessities and pleasures alike, such as housing, insurance, food, self-improvement, entertainment, and vacations.
This bucket is primarily financed through my earned income. Concepts like Smart Frugal and paying myself first ensure a balanced approach to living, where essentials and pleasures are adequately addressed without compromising future financial stability.
The Second Bucket: Personal Investments
The second bucket encourages the acquisition of assets for personal enjoyment, like cars or luxury items, through a savvy investment strategy.
The aim is to make investments that generate cash flow to finance personal assets. My investment in a passive ATM Fund to finance my next vehicle is the perfect example of this.
This method allows for the enjoyment of life’s finer things while fostering financial prudence and growth.
The Third Bucket: Educating The Next Generation
Initially, my system comprised only four buckets until I recognized the importance of planning for future educational expenses.
I’ll save my whole spiel on our education system for another article. However, in short, I believe it’s the parent’s responsibility to make sure their children receive an education that allows them to thrive in the real world.
That doesn’t necessarily mean sending them to private schools. But rather ensuring that they receive the supplemental education they need during K-12 to set them up for success.
As for college, I don’t believe that college is necessary to succeed in general, especially in business. However, there are certainly some professions and fields of work, such as law and medicine where college is necessary, and perhaps even the most appropriate form of education.
For these reasons, I’m not sure all my children will go to college; although I expect my children’s education to continue after K-12. So I’ll likely fund at least one 529 plan as they can be transferred among siblings. There will also be a lump sum invested at birth along with monthly contributions to fund their education, whatever it might be.
I don’t have children at the moment and added this last, making it the least detailed and most likely to change among all five capital buckets.
The Fourth Bucket: My Retirement Fund
While I don’t foresee a traditional retirement for myself, it’s wise to be prepared.
This bucket isn’t about amassing wealth but ensuring stability in retirement. By maximizing contributions to retirement accounts and investing in broad market indexes, I create a safety net. This allows me to embrace greater business and private investment risks without jeopardizing my long-term security.
The biggest issue some have with this strategy is everyone thinks they’ll be in a high tax bracket when they retire, will not need their retirement accounts, and have to pay high ordinary income tax rates on the income from their retirement accounts rather than more favorable long-term capital gains rates on similar investments held in taxable brokerage accounts. This will certainly be the case for some, however, statistics indicate it won’t be for everyone.
And so if I do hit it big in business and investing and don’t need these accounts?
Then at that point, I’ll cease contributions, and use Qualified Charitable Distributions (QCDs) during retirement. QCDs minimize exposure to Required Minimum Distributions (RMDs), mitigating the tax implications of a well-funded retirement account.
A small price to pay to be able to confidently swing for the fences in business and private investing.
The Fifth Bucket: The Family’s Generational Wealth Fund
The apex of this strategy involves the creation of dedicated holding companies for long-term investments aimed at establishing enduring wealth.
This bucket, fueled by entrepreneurial ventures and the strategic reinvestment of returns, focuses on building a substantial legacy through wholly owned businesses, real estate, and diversified investments, including liquid index funds, and minority stakes in real estate, and private businesses.
Room for Improvement
This budgeting system is in its early stages, and I anticipate it will evolve with ongoing use and refinement. For more frameworks like this, join my private investing newsletter and follow me on Twitter (X).
