Friday, April 11, 2014

The Bucket System - Part 2

In Part 1 of the bucket system, I wrote about how white-collar workers like us wait 30 days for the bucket to fill up, only to spend it all away, month after month. As promised, this is part 2.

This is the bucket system that we should all strive to build - one that will provide a continuous stream of income:

What is this?

If you still don't get it by now, the first tier (your income) should flow down to your expenses (rental, food, consumer spending) and any extra should flow down to your emergency & freedom buckets.

The question is, can your freedom chips flow from your income bucket all the way down to the bottom tier (your freedom buckets)? Or does it stop at the second tier at your (expense bucket)?

Imagine if the first bucket (income) is filled with water, how much of it will reach the bottom (freedom buckets)? Most white collar rats struggle to even fill up the expense bucket, let alone the buckets below.

It should be clear to you now that the only way to fill up the buckets below is to either:
1) Increase income; or
2) Reduce expenses; or
3) Go extreme, do both.

Size does matter...

Obviously, anyone who tells you that size does not matter is lying.

The size of each bucket matters. If you look at the diagram above, the goal is to keep your income bucket as large as possible while your expense bucket as small as possible. This will always ensure that there will be extra freedom chips that will flow down to the most important bucket - the freedom bucket.

Emergency buckets

The only reason these buckets exist is so that you can sleep better at night. As a general rule, you should have at least emergency buckets that can cover up to 3 times of your expenses.

Look at these buckets as a margin of safety, or a wall that protects you from the uncertainties in life. These walls will protect you in times of need.

Once these buckets are filled, proceed to fill the freedom buckets.

Freedom buckets

Freedom buckets are investment vehicles that will continue to provide a regular stream of freedom chips (without throwing your life at the corporate treadmill forever). These freedom buckets should also be as large as possible, and if you noticed, the number of freedom buckets matter as well.

Therefore, freedom buckets should be diversified; stocks, real estate, other forms of minimally active businesses/income streams.

The ultimate goal: towards White Collar Freedom

The idea of the bucket system is to build a continuous flow of income that will always provide enough, if not more.

"Everyday, with every second of your time spent in that cubicle, you are trading your life for freedom chips, you either start building a bucket system out of it, or you simply wait for 30 days, month in, month out."

The choice is yours.

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