The Four Financial Baskets

2006-07-09

Financial planners state that when starting to save for retirement you need to be aware of the four financial baskets. These baskets help define how you should divide up your savings. Here is an overview.

Short Term
The short term can be best described as your emergency fund or liquid assets on hand available for immediate use if you were to need it. Many financial advisers recommend that you should have a minimum of three to six months of living expenses. These funds are usually held in a checking accounts, savings accounts or money market accounts. Any cash value you have built up in life insurance policies could also be considered short term deeming that you can access the funds in a couple of weeks.

Midterm
Midterm is considered money you are saving to spend. This is money you are planning to use to purchase something in one to five years. Examples of these things are second homes, boats, home improvement projects, vacations, short term educational needs, etc. These funds are typically held in financial instruments like CD’s, short term bonds, balanced mutual funds, and preferred stocks.

Long Term
Your long term basket is designed to hold the savings that you plan to hold for ten years or longer. These are goals that focus on long term educational needs, long term care, and supplemental retirement funding. This is for especially important for those looking to retire before the age of 59 1/2.

Long term savings need to weather the volatility in the market. A good choice for weathering this volatility is by combining a mixture of financial instruments such as mutual funds, balanced funds, manage separate accounts, stocks, real estate, bonds, and cash value life insurance policies or annuities. Be sure to investigate each carefully and pick and choose those that fit your investment strategy best.

Retirement
This basket is reserved especially for savings that you do not plan on touching until your retirement. These funds will be used to pay your daily living expenses after you are retired and no longer working. Don’t be fooled and think that Social Security will take care of you during your golden years. The fact is that Social Security and employer sponsored retirement plans cover less than half of what you will need during retirement.

Many Americans are living 20 or more years in retirement now. This creates a major need for increased savings during your working years. Taking advantage of savings plans outside company sponsored 401k plans like Roth IRAs and brokerage accounts.

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