Where should I put the money I save?

Not all savings are created equal, so deciding where to put the money you save is just as important as what percentage of your income you’re saving. Here we’ll look at what the investing world calls asset allocation – how you break up your resources and savings – and why dividing up your assets is the cornerstone of smart saving.

The three buckets of asset allocation

There are three parts, we’ll call them buckets, of strategic asset allocation: your Security Bucket, your Risk/Growth Bucket, and your Dream Bucket. By wisely balancing these three areas of investment, you’ll be able to grow your savings and get closer to financial independence. To put it another way, think of these buckets as giving direction to your overall financial plan.

The Security Bucket: steady and safe

Your first bucket is the Security, or Peace of Mind, Bucket. This bucket gives you certainty in your life. It’s like the tortoise in the story – slow and steady wins the race. But here winning the race means not losing your life savings. If the Security Bucket were a car, it would be your family’s old Toyota or Volvo with 230,000 miles on it. The ride doesn’t turn heads, but you know you’ll get to your destination.

Essentially, you keep the part of your nest egg you can’t afford to lose in your Security Bucket. It’s a sanctuary of safe investments that you lock up tight – and then hide the key.

So what kind of investments should you allocate to your Security Bucket? You want investment options with low volatility.

These include:

  1. Cash/Cash Equivalents (such as money market funds with checking privileges)
  2. Bonds (such as TIPS, or Treasury Inflation-Protected Securities)
  3. Market-linked CDs
  4. Your home – An asset, but not an investment. This is your sacred sanctuary, so you shouldn’t be “spending” it!
  5. Your pension (if you’re lucky enough to have one)
  6. Guaranteed Annuities
  7. Your life insurance policy
  8. Structured Notes (One with 100% principal protection, purchased through an Registered Investment Advisor)

These investment types grow slowly, especially at first, but the power of compounding means you can count on these investments to reap maximum rewards in a secure environment. It’s step one of strategic asset allocation.

The Risk/Growth Bucket: fast and volatile

The Risk/Growth bucket of asset allocation is exciting because it can gain some truly amazing returns. It’s the Alfa Romeo of your investments – beautiful and fast, but you might also end up stranded on the side of the road wondering what went wrong. Although you can be rewarded for your risk in these investment types, you can also lose everything you’ve saved and invested here.

The bottom line? Whatever you put in your Risk/Growth bucket, you have to be prepared to lose it, particularly if you don’t have protective measures in place.

What kind of investments fit into your Risk/Growth Bucket? These seven main asset classes fit the bill of potential high returns… or deep losses:

  1. Equities – another word for stocks, or ownership shares of individual companies or vehicles for owning many of them at once, like mutual funds, indexes, and exchange-traded funds (ETFs).
  2. High-Yield Bonds (aka junk bonds)
  3. Real Estate
  4. Commodities (gold, silver, oil, coffee, cotton, etc.)
  5. Currencies
  6. Collectibles
  7. Structured Notes (anything without 100% principal protection)

Depending on your personality type, it can be easy to get caught up in the idea of great returns and forget how much you are risking in the process. Ultimately, it’s the right mix of the Security and Risk/Growth Buckets that makes for smart, strategic asset allocation.

Don’t forget to diversify

Remember, don’t just diversify your savings between your buckets, but also diversify within them as well. As financial master Burton Malkiel shared with Tony, “Diversify across securities, across asset classes, across markets – and across time.” Spreading your money across different investments decreases your risk and increases your upside returns over time.

The Dream Bucket: investing in fun

This third bucket is to have fun. With your Dream Bucket you set aside something for yourself and those you love so that all of you can enjoy life while you’re building your wealth. It’s meant to excite you, put some zest in your life so you want to earn and contribute even more. Sound silly? Think of the items you’re saving for in your Dream Bucket as strategic splurges. They’re a key part of sustainable asset allocation strategies.

With this bucket, be creative. What can you not stop dreaming about? What would be a glorious experience you’ll remember forever? It could be season tickets to your favorite sports team or theatre. Maybe a new car – one that isn’t so practical. It could be handing over the deed for a new home to your parents and treasuring the look on their faces. Perhaps you fly a lot and dream of upgrading from Economy to Business Class? Your imagination is the limit.

Many people have a lot of money but not much lifestyle. They spend their lives watching numbers accumulate in a bank account and miss out on the joy along the way. Your dreams are not designed to give you a financial payoff; they are designed to give you a greater quality of life.

There are three ways in which you can fill this bucket:

  1. Jackpots – If you get a bonus or a windfall of some kind, use it to fuel your dream tank.
  2. Your Risk/Growth Bucket gets a positive hit and you score big. In this case, you may want to take some of your earnings and put one-third of these unexpected dividends into each bucket. You’re spreading out your risk, increasing your security and getting to achieve your dreams. Not bad!
  3. Save a set percentage of your income and hide it away until you’re able to purchase what you desire. This savings would be separate from what you’re using towards building your Money Machine.

Asset allocation is just one step in creating the path to financial freedom. Armed with this division of savings you’ll be able to better set your future self up for success.

Saving is just the beginning of financial freedom

Discover more ways to allocate your assets in Tony Robbins’ Unshakeable: Your Financial Freedom Playbook, the bestseller that covers what you need to master your personal finances today.

Legal Disclosure: Tony Robbins is a board member and Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity and based on increased business derived by Creative Planning from his services.