How to build a financial plan that doesn’t require you to react
By Rosalyn Kemp, CFP® · Founder, Chestnut Beach Wealth
A financial plan that does not make you react starts with what you spend, not what you own. I sort your money into three buckets by when you need it: liquid cash, time-matched bonds, and growth and legacy assets.
Every good plan starts in the same place.
The most important number in your financial life is not your portfolio balance. It is not your rate of return. It is not your net worth.
It is how much you spend each year.
What does it cost to fund your life today? That number is what keeps you living the life you want. It is the foundation everything else is built on, and it is the first piece of data we will discover together.
Next, what are your big near-term expenses over the next five years? Tuition payments, a wedding, a down payment on a second home, a new car, helping a parent who needs care?
Only after we know how much cash you need over the next five years will we discuss taking investment risk and growing your wealth in the equity markets.
I’ll build your asset allocation the way a disciplined company manages its finances. It starts with expenses. Reserve those in cash. Build a near-term cushion. Then invest everything else in growth — the projects, the compounding that builds something beyond what you imagined when you started.
One of a business’s most common financial risks is running out of cash. A disciplined CFO funds the business first, then chases growth. I will build your asset allocation the same way.
3 Months to 1 Year of Cash
Living Expenses:
Mortgage, Tuition
Vacations, Insurance
Emergency Reserve
Next five years: Planned RMDs, upcoming expenses like vacations, wedding, tuition – maturities matched to goal
Global Index Funds
Real Estate
Long-term Holdings
Retirement Accounts
Legacy Assets
This is your asset allocation. Not a generic “60/40 mix” based on age. Like a bond manager matching duration to cash needs, we match your asset allocation to your life.
Think of this as your household cash manager: the money that keeps everything running. Its job is to cover your bills, so you are less likely to sell investments to pay them.
How much you need depends on you: your life stage, income stability, expenses, and comfort level. For some clients, that is three months of cash. For others it is a full year. There is no universal answer. What matters is that the number is honest and deliberate, not a guess.
Think of every obligation you have this year: mortgage, groceries, utilities, insurance, tuition, vacations, the things that make your life your life. All of it lives here. Liquid and stable, with little exposure to market moves.
This bucket is not earning a great return; that’s not its job. Its job is to be there regardless of what the S&P 500 did last week or what decisions Congress will make next month.
When Bucket One is full, you can preserve peace of mind during drawdowns. In investing, the ability to wait is worth more than almost any strategy.
Bucket One funds your life today. Bucket Two funds your life for the next two to five years. Its job is to refill Bucket One on a predictable schedule, designed to reduce the chance you will need to sell long-term investments during a downturn.
This is where the bond manager’s discipline comes in.
Why bonds are more volatile than you think, and what that means for you →
I am not buying you bonds to maximize returns. I am not buying you bonds because I think rates are going down. I am buying you bonds that match when you will need the money. A bond maturing in Year Two covers Year Two’s expenses. A bond maturing in Year Three covers Year Three’s expenses. The daily price swings in between are irrelevant since you committed to the term and the term delivers.
If you are still working, your employment income already does much of this work. A steady paycheck is bond-like: predictable, recurring, uncorrelated with equity markets, and something you can plan around. Dividend income from your portfolio plays the same role, and we count it here, not in Bucket Three.
This is the engine. Everything that isn’t funding your life in the next five years lives here, fully invested in equities, real estate, or other growth investments that have historically outpaced inflation over long periods, though results vary, working as hard as possible over the longest time horizon possible.
No bonds. No hedging. No buffer strategies, structured notes, or complicated overlays designed to smooth the ride. Those products exist to solve a problem Buckets One and Two have already solved with cash and fixed income.
Bucket Three can be aggressive because it has time. Time is your risk capacity, not your risk tolerance questionnaire score. How much time you have before you need the money is the single most important input in determining how much risk you can afford to take. Time is the best downside protection.
Investing in global equities is a long-term bet on human ingenuity, innovation, and our collective ability to solve problems and create value. Historically, global equities have rewarded patient investors over long periods, though past results do not guarantee future results. Not every quarter, not every year, but over time, with patience, it compounds. Because your life doesn’t depend on what this bucket does this year, you may be better able to hold through volatility and let compounding work.
Retirement accounts live here too: your 401(k), IRA, Roth IRA. Long-term, tax-advantaged, fully invested. Let them work.
The only question for Bucket Three is: how much can you afford to put here? And the answer comes directly from Buckets One and Two. Once you’ve funded your life and built your bridge, everything else becomes your engine.
Most financial plans start with a number. What percentage should be in stocks? What percentage in bonds? The industry default is a generic “60/40 mix,” adjusted slightly for age, and presented as a strategy.
I prefer a more strategic approach.
Your asset allocation is determined by your liquidity profile, not your age. How much do you need in Bucket One to fund your life without touching your portfolio? How much do you need in Bucket Two to replenish it on schedule? Everything left over is Bucket Three.
When you build your buckets and match them to your life, something shifts. Market volatility can feel more like noise than a threat. You stop watching your portfolio every day because you already know next year is covered. And the year after. And the year after that.
