Todd Polke breaks down five allocation buckets for investors: emergency funds, portfolio shortfalls, near-term expenses, investing in your earning potential, and capital to deploy during market downturns. Each buffer serves a specific purpose in a complete financial plan.
There are 5 different allocation buckets that I always have set up. First is a personal buffer, which is a bit of a sleep at night factor. If something happens to work or life or health or family, you've got some money set aside that can help you ride through the inevitable road bumps of life. The second buffer is an investment buffer. Now, this is to cover any shortfall associated with your overall portfolio, a bit of a slush fund which is just sitting there, because one of my core principles is that your personal life is a business. Your investment portfolio is a business and we want to keep these 2 separate so it's not chewing up the cash flow out of your back pocket. The 3rd buffer we have is stuff buffers, but it's for anything, any big expenses that you know that are coming up over the next kind of 1 or 2 years you need to start planning towards. The 4th buffer is your growth buffer where you are investing money into yourself to grow your earning potential. The 5th buffer is all about setting aside capital for your investment portfolio. So I think it's a key part of any allocation, especially for more seasoned investor, to take advantage of fire sales when they come up.
