We will never have enough money to save. This is a fact that we have to accept when we start financial planning. Securing a new client, paying off our mortgages or even getting a pay raise is unlikely to increase our monthly savings.

Why, you ask? This is because if we aren’t already saving now, it is unlikely that we will save when we find ourselves with more cash. The act of saving is a culture and habit that has to be consciously cultivated, only the amount we save is dependent on the income and expenses of our daily life.

But once you start saving, what is the best way to protect and maintain your savings?

Saving Money


Savings can generally be split into monthly and lump-sum savings (or buckets). Each provide specific benefits and drawbacks which we will discuss further.

Monthly Savings

Monthly saving are savings that are made by regular deposits into an account or fund. This is the most common type of savings. The amount in a monthly savings plan is more palatable than one from a lump sum plan. It is a disciplined approach to savings that requires dedication to separate a portion of your income.

Most monthly saving plans discourage withdrawal and thus only facilitate partial withdrawal. This is done by setting limits on the amount you are able to withdraw in a day and month.


Monthly Savings

In terms of investment options, a monthly savings plan with consistent monthly investments will be able to do dollar cost averaging over a longer period of time. Monthly saving buckets tend to take roughly 13-15 years to mature on average and is generally used for big purchases in the future or retirement.

Lump Sum Savings

Lump Sum Saving are savings that are made up of one large deposit into an account or fund.

This kind of saving maximises the concept of present value of annuity. It provides greater returns as the entire bucket is invested and starts to earn an interest right from the get go.

However it is rare to have a chunk of money just lying around, ready for investment. That’s why most people start with a monthly savings bucket to save up enough to build a Lump Sum bucket.

Lump Sum Saving plans are also highly liquid and many will allow you to withdraw your cash on dem and. Having a full bucket means that you’re able to quickly pay off any emergency expenses, medical or large purchases without having to worry about instalment payments or interest liability.

While lump sum savings are used for the same purposes as monthly savings, they do not have a maturity date. Depending on where you put your lump sum savings, you might find yourself in an unwanted lock-in period if you’re not careful however.

So which one is the right approach?

The Two Bucket Theorem

Well, the two bucket theorem states that the best way to plan for your future is to use both buckets simultaneously.

The first bucket is the lump sum which will be used as the active bucket . This is because the money will be invested and grown, but also be used to pay off early expenses like for the children’s education, your first house and your first car.

The second bucket is monthly savings, in which you are constantly depositing savings. This replaces the first bucket, once it is depleted. This bucket should not be touched for expenses until it reaches maturity. As money placed in this bucket will be placed into investment portfolios with lower liquidity and facility of withdrawal.

Here’s an example…..

For example, at age 34, you have a neat lump sum of $200k and a monthly disposable income of $3k. Of this $3k, you save $1k monthly. Your objectives are to pay off the children’s education, house and car by 49 years old and to retire by age 55. Hence you should only use the first bucket to pay off expenses all the way till 54. While at the same time slowly adding to your retirement bucket. If you save $1k for 20 years, with interest rates you should save up at least $240k by the time you reach 54 years old. By recognising this, one should implement the two bucket theorem early. And plan for their financial success before it is too late.

Want to know more………

To learn more about how to help manage your financial needs with the help of Two Bucket Theory, please contact Deepak Singh , a qualified MAS registered financial advisor with  Global Financial Consultants Pte Ltd .

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