The Bucket Concept
I’d like to introduce you to something called the Bucket Concept.
What we know is that many business owners avoid detailed financial planning. What I hope is that the Bucket Concept will help you get perspective of why detailed planning is so important.
So, I’d like you to draw a bucket in the middle of a piece of paper.
Now draw some water, about half way up. The water represents your total liquid capital that you can spend.
Now, draw a square above your bucket. That’s your business.
Draw another box next to it. That’s your house.
Draw another. That’s your pension fund.
Draw arrows coming in from your boxes into your bucket.
From your business will be your profit flowing into your bucket. This will come in every month.
But, there will also be one-off capital sums.
These can come from downsizing or selling your house, drawing your tax-free element of your pension and selling your business.
Now draw an arrow coming off the bottom of your bucket. This is your monthly expenditure.
Draw arrows for one-offs like Weddings and helping your kids get on the housing ladder.
Remember, in later life as you stop accumulating assets, what comes into your bucket may be less that what goes out.
The key question is are you going to have enough water in the bucket to take you to the time you kick the bucket?
Now, the only way to know is to complete a personal cashflow forecast.
Start with your current monthly expenditure. Then modify this for what you want and how your life changes.
Keep in mind that it is more common for people to transition into retirement; going from full-time to part time before doing no-time. This will need to be factored into your cashflow.
When you have a personal cashflow forecast you can use it to keep you on track, and is an initial method of quantifying those aims. Projected costs against projected incomes will identify those areas you need to focus on.
When you complete your personal cashflow forecast you will know your Life Number. This will be a figure of how much you need for the rest of your life.
When you have this you can work out if there is a shortfall or too much?
If there is too much cash you can think about stopping work early, spending a bit more.
If there is not enough you can exploring how to plug the leaks.
This could be modifying your expenditure.
But, not many people what to change their lifestyle and as a business owner you have the opportunity to put more into the bucket.
Your business is probably the only financial asset you have control of. You can’t effect the value of your house, investment returns, inflation or annuity rates.
Many business owners have the idea that they will build and sell their business to help fund their retirement. But, the reality is that most small businesses never actually get sold; they just close down.
This is such a serious issue that the Government commissioned a report. The Turner Report published in 2004 revealed that there is a Pension Crisis in the UK.
Lord Turner estimates 12 million people will not be able to retire because they cannot afford to. Many more millions will not live the life they really want when they stop work because of longer life spans, reduced pension returns and higher costs of living.
This was before the Credit Crunch and Recession which is having a profound impact on businesses and investment returns.
Many people, especially business owners make the mistake of vastly underestimating what it takes to maintain their lifestyle after they exit from the business world.
Annual income of £50,000 before tax requires an additional £1 million of liquid capital to go into an investment portfolio. For many, being a millionaire is a necessity rather than a dream.