Never Retire - How Versatile A Pots Of Money Approach To Personal Finance Can Be

And it helps create cash security and psychological comfort

Two comments from two paid subscribers (thank you!) to the Never Retire newsletter nicely sum up the power of a pots of money approach to personal finance.

We’ll take each comment, line-by-line, and illustrate the efficacy and versatility of this style of cash flow allocation.

There’s just a psychological comfort that comes from having cash earmarked for specific purposes in multiple bank accounts.

Comfort versus a feeling of disarray. I bet if we could reliably survey the population we would find most people have two bank accounts—one for checking, one for savings.

From there, anything probably goes.

Some people keep too much money in their checking account. The savings account—that’s a symbolic gesture to feign personal financial prudence. Others stock their savings, but it’s little more than an emergency fund that also covers budget shortfalls via transfers back to the checking account.

However you slice it, there’s no rhyme or reason. Without structure and a few goals followed by at least a loose plan, you’re likely to struggle and feel more stress than needed with money.

Goals became crystal clear and the stress of “not being sure” about that lump sum disappeared.

Last month, we discussed how impossible it is for many, if not most of us to save for traditional retirement. In some cases, it’s because we’re trying (because we’re told) to do everything at once—save for retirement, service a mortgage and cover the associated costs of home ownership, have a family, and live the attendant and anticipated lifestyle.

I summed up the conundrum in a recent Medium article:

If you make good, but a limited amount of money, it’s next to impossible to do all of these things, come out ahead most months, actually enjoy life to its fullest in your prime and retire traditionally in old age.

Next to impossible.

See, again, the aforementioned retirement crisis. There’s a reason why so many people don’t have shit saved for traditional retirement, irrespective of age and, often, even income. Because you simply can’t do all of these things we’re expected — and encouraged — to do with money all at once. Especially if you want to have a fun life with a limited amount of money-related stress.

It’s a recipe — somewhat ironically — for living beyond your means.

It’s very easy to live beyond your means—even if you make good money—when there’s no or little structure behind how you allocate your cash flow. You’re ultimately guessing that you’ll have enough piled up in one or two, unlabeled accounts to cover all of these aspects of life. So they end up competing against one another.

Simple weekly transfers into savings accounts labeled with short- and long-term goals go a long way toward solving this problem.

If nothing else, you have a clearer picture of what you can and can’t afford.

Or, more optimistically, you’ll discover you’re putting too much money in the home maintenance fund, but falling short on saving for your kid’s college education. Now, you can make an informed adjustment.

That being said, the relief has been a great surprise; a wonderful unanticipated benefit.

Well-stated. And absolutely the case.

To get started, here’s the intial Medium article I wrote on the pots of money approach and a recent Never Retire newsletter post that expands on it.

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In closing, Jen’s short, but complete comment.

Pots of money aren’t static. Ultimately, they provide versatility and flexibility. They help you improve your vision.

As in the too much money for maintenance, not enough for college example.

Or Jen’s move of keeping a travel fund, paying for the pre-booked elements of travel out of it (and maybe your checking account cash cushion), then using travel fund money to cover expenses while traveling and maybe back home if you’re losing income while not working.

I plan on executing a variation of this as my girlfriend and I plan to spend the month of February in Spain and Italy.

It will look a little something like this—

• Book the key elements of travel early. In fact, I will finish booking them this month.

• Never stop with the weekly automatic transfers to my travel fund. So, between now and February, it’s beefed up again.

• Use the travel fund for expenses while traveling.

The key to this—and really the entire pots of money approach—are the automatic transfers. Preferably weekly alongside any unplanned additions you can spare.

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I hope you enjoyed today’s installment.

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