Sunday, May 5, 2013
The Theory of Managing Money and Wealth Creation
Imagine that each bucket represents one of the basic financial needs which are necessities. The first bucket represents basic needs; food, shelter, clothing, and transportation. The second bucket represents financial security and includes an emergency fund and savings plan. The third bucket represents a family’s insurance needs, including life, health, and property protection. The fourth bucket represents quality of life. The fifth bucket represents investments. The water that flows from bucket to bucket represents the resources a family has.
To build a sound financial base for a family, each bucket must be filled before resources are diverted to the next one. First resources are used to provide basic needs. As income increases and money is left after basic needs are met, the extra is used to develop an emergency fund and begin a regular savings plan. When saving is regular (ideally 10-15 percent of income) and the contingency fund complete (containing 6 months’ income), the next step is to purchase adequate insurance to protect the family’s health, income, and property.
When adequate insurance coverage is provided, extra money is then diverted to building quality of life. A good quality of life focuses on acquiring some of the needs, extras, and frills. The last step is to channel the extra money available into investments that will provide a secure future for the family. This might include money for children’s education, the retirement of the income earner, or family goals. This approach helps in providing a sound approach to ones financial foundation.
The theory of managing money is a common sense approach to planning a family’s financial structure in future. It provides a systematic way for families to set and reach financial goals and it helps the family build a sound financial foundation.