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Growing up there was a kid in my school whose family was rumored to be somehow in business with or related to the Gambino crime family, possibly as an attorney of John Gotti aka the Dapper Don. The main evidence we had for this was that the kid always had loads of cash on him, claimed his parents didn’t use credit cards, and occasionally arrived to school in a fancy car devoid of license plates.
Honestly, in hindsight I doubt it was true (I mean maybe it was?? This is New York after all), but it was fun to speculate and it’s not like the kid was bullied– he was smart, personable, athletic and popular, so the whole thing seemed pretty harmless (separate from, you know, all the actual mobster stuff that was going on in that era).
In any case, I remember wondering how families like that paid for regular life: their mortgages, phone bills, etc. Did they budget their lifestyle based on, like, expected bank heist hauls? Did they keep wads of cash in different envelopes designated for each expense category and then delivered by hand to Con Ed or whatever at the end of the month? How did they pay for spring break and summer camp? (I may have already been interested in personal finance, but was definitely not up to speed on basic criminal banking practices.)
The idea of visualizing stacks of cash sorted into envelopes organized by category is actually not a terrible idea, with a little tweaking. It’s also a concept known as the bucket strategy.
Typically the bucket strategy is used to describe a way of planning for retirement in phases, but I think it’s also super helpful for creating a general money framework. For example, you could visualize your income divided into four buckets: 1. taxes 2. recurring expenses (roof over your head etc) 3. savings 4. fun money.
For investing purposes you can bucket money by the time frame you are most likely to use it. And while of course cash has its place in our lives, luckily we’re not mobsters so there are a wide range of (legal) asset types available to us.
Here are the kinds of things you could think about if you wanted to try this approach (note this is fairly standard guidance and your situation is specific to you):
What might you need money for within the next 2-3 years? Your emergency fund? A house downpayment? A wedding? Any of these things would go into a short term bucket, that you’d keep very low risk, ie things like cash in a high yield savings account, a money market fund, or short term Treasury bills.
Are you funding education for your children? Depending on the age of the children, this would normally fall in an intermediate bucket (whether it’s in a portfolio under your own name or in a 529 account), with a mixture of bonds and stocks. But the closer you get to college the more you’d want to start shifting it into a lower and lower risk profile (ie the short term bucket) because you know you’re going to need the money soon.
How close are you to retiring? If you are still earning an income and probably won’t touch your investment portfolio for at least 15-20 years, your longer term bucket can absorb more volatility, and thus can hold a higher weighting of stocks.
Are you already retired or thinking of retiring soon? You’d probably be more conservative (hold more cash and lower risk bonds) with at least a portion of your portfolio, if you know you’re going to be living off of it soon. You may also have a separate mini-bucket at that point (maybe in the form of an HSA or long term care insurance) for health care expenses.
Are you managing your wealth with an eye towards future generations? This is the bucket for people who are planning to leave substantial legacies to their kids and grandkids and know the money won’t be touched for a very long time. What can go in there? Things like life insurance policies, private equity investments, education or dynasty trusts, and rental properties.
