Your strategy may be sound, but it may need some tinkering. Here’s how to plan for your spending needs in any market cycle.
Is there a chore more widely disliked than budgeting? It’s tough to imagine. So, let’s say right off the bat—this is not an article about budgeting for your lifestyle needs. Instead we discuss how you can plan for your lifestyle spending so that you don’t have to budget. The goal: Set aside enough money in your lifestyle “bucket” and invest it appropriately to meet the spending needs and wants you and your family will have over the course of your lifetime.
Bear in mind: You should think of a “lifestyle bucket” as separate and distinct from a “liquidity bucket.” The liquidity bucket holds cash and other forms of liquidity to cover operating cash flow, big ticket purchases and opportunistic investments, while allowing you to sleep well at night. A lifestyle bucket contains financial and investment resources—set aside in a “lockbox” strategy—that you hope will reliably provide for your lifestyle needs and wants over your lifetime. If anything were to happen, there is money available for the sole purpose of a comfortable life.
Our approach to thinking about the lifestyle bucket has four elements:
A wide range of spending is embedded in your lifestyle, but it generally relates to one of three categories: you and your spouse/partner; your family; your community. In the first category, determine how much money is spent on basics such as food, clothes, home maintenance, travel, ongoing large purchases—the nuts and bolts of daily life. In the second category, what are the intended gifts to family members, a roster that could include college education for children and grandchildren, wedding expenses, annual gifts and, perhaps, the family’s summer home? Finally, a third category covers community-minded gifts such as donations to your alma mater or charitable contributions and philanthropic bequests.
The next step is to estimate a dollar value for each of those categories. Again, we’re not suggesting that you set these out in a budget—but what’s the total number? These may be fairly precise or rough estimates. Some people may not want to get into specifics and instead say—I spend about X dollars a year on myself and my spouse, Y dollars on my children, and Z dollars on community-minded gifts.
Time may be one of the most important elements when thinking about setting aside a bucket of resources. Time is a major determinant of how much money should be held and how it should be invested. Living well past 90 years old is no longer an unusual occurrence, so if you’re 60 years old, reserving an annual lifestyle spend for 30 to 35 years may not be out of the question. And if you are going to be investing toward a long time horizon, taking measured risk for extended periods of time may make sense. But if you need large portions of the lifestyle bucket in the near future, dialing down that risk may be a critical consideration.
So, you have the important numbers—you’re going to need a certain amount of money over a certain number of years. Now ask yourself an important question that may be difficult to answer: With what level of certainty do you need to know that those lifestyle expenses will be covered? If you require a high degree of certainty, you’ll need to set aside relatively more in the lifestyle bucket. That’s because it will be more conservatively invested. On the other hand, if some of your lifestyle expenses are flexible, you may choose to allocate relatively less and invest it more aggressively, and with greater risk assume greater reward—but you’ll have less certainty that you will be able to meet those goals.
Do you want to opt for greater certainty with a larger bucket of money set aside? Or lesser certainty with a smaller bucket? That’s the unavoidable trade-off. (Alas, you can’t have your cake and eat it too.)
To help bring this concept to life, here’s an example of how you can think about aligning capital from your overall portfolio into a lifestyle bucket (see graphic below).
You can make the trade-off more palatable, though. It might help to divide your lifestyle needs into essential and discretionary spending. Perhaps two-thirds of the spending feels non-negotiable but one third could be eliminated with no serious discomfort. In this scenario, the essential bucket would require greater certainty and would thus be sized and invested accordingly, whereas the discretionary spending could be targeted with a smaller bucket and a more aggressive investing strategy. Remember, though, that you’d need to be prepared to “give up” the discretionary expenses if circumstances demand it.
Be honest—acknowledge when an expense really feels essential. In this context I’ll mention a not-so-secret fact about how humans behave with their money: As our wealth level increases we tend to increase our consumption and spending to align with our new status. Maybe that means another home, or a more valuable piece of art. What might have felt a discretionary expense a decade ago is now essential.
The important thing is to think about trade-offs intentionally and deliberately—and heed the message they send. Maybe the message is that you’re spending too much or too little relative to your wealth level. Maybe the message is that you have a sound plan to cover your lifestyle needs, but perhaps the plan needs some tinkering. Keep your eye on the ultimate goal: Make sure you have allocated enough money to your lifestyle bucket and are investing it appropriately to meet the spending needs for you and your family over the course of your lifetime. We believe our four-element approach can be helpful in guiding your thinking, and informing your conversations with your family and trusted professionals.
Learn more about becoming a J.P. Morgan Private Bank client.
Please tell us about yourself, and our team will contact you.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPM. Products not available in all states.
In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch. Prior to Brexit (Brexit meaning that the United Kingdom leaves the European Union under Article 50 of the Treaty on European Union, or, if later, loses its ability to passport financial services between the United Kingdom and the remainder of the EEA), J.P. Morgan Bank Luxembourg S.A., London Branch is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from us on request. In the event of Brexit, in the United Kingdom, J.P. Morgan Bank Luxembourg S.A., London Branch is authorized by the Prudential Regulation Authority, subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain.
J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cantena Adalberto 4, Milan 20121, Italy and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In addition, this material may be distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers or by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore.
J.P. Morgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as
J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission–CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide.
“J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM.
This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative.
© 2019 JPMorgan Chase & Co. All rights reserved.
INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.