Building passive income isn’t a privilege of the ultra-wealthy. It can be accomplished by anyone with a stable income and the dedication needed to stick to a plan. There are many ways to allocate resources and create a passive income stream, but the 3-bucket system has proven to be the most accessible to novice investors.
In this article, we’ll explain the method and how to make the most out of it without making your investments too risky and dangerous. The system works regardless of the amounts you put in, which means it’s scalable.
What’s the 3-Bucket Passive Income System?
The 3-bucket passive income system is a framework for investing that separates the investments into three sections based on the level of risk and potential returns. Each of the three “buckets” serves a different purpose in this regard:
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- A stable bucket is for the least risky investments and, therefore, for steady and low-risk income.
- A growth bucket is for long-term investing with moderate risk.
- The experimental bucket is for the short-term, high-profit investments that offer high rewards but are the most risky.
By using the system, the investors can reliably expect to get ahead regardless of the changes in the market, as at least one of the buckets will always yield profits.
Bucket 1: The Stable Investments
This bucket serves as a foundation for your financial efforts. It should be designed to produce a steady cash flow and build your wealth over time. For some, this bucket can also serve as an emergency fund in case they lose their regular income, but it’s best to have a separate emergency fund before investing.
Examples of Stable Bucket Income Sources:
The most common income sources for this bucket include:
- Dividend-paying stocks from blue-chip companies.
- High-yield savings accounts or CDs.
- Government or municipal bonds.
- Rental property with long-term leases.
- REITs (Real Estate Investment Trusts) with stable performance.
Key Characteristics
When choosing assets for this bucket, it’s best not to focus on individual assets and potential profits but on the broad characteristics that these assets bring to your investment plans. These are low volatility, long-term efforts, predictable returns that you can rely on, and a focus on capital preservation.
Tips for Success
First, choose investments that don’t require a lot of work and management. It’s best to automate as much of the process as you can so that it doesn’t take time and doesn’t require hiring experts. Try to reinvest the earnings whenever possible.
Bucket 2: The Growth Bucket
This bucket is for building wealth over time. It should focus on assets that won’t pay out right away but have potential in the middle term. This allows the investor to diversify with a variety of different assets. It’s easy enough for investors to learn how to buy Bitcoin without fees (from resources such as the one here), and traditional stocks and bonds come with even more online resources.
Examples of Growth Investments
- Index funds and ETFs with broad market exposure
- Rental properties in high-demand areas
- Cryptocurrencies known for stability, such as Bitcoin
- Dividend growth stocks that increase payouts over time
- Private real estate funds with a focus on appreciation
Key Characteristics
This bucket should be dedicated to assets with moderate risk and a higher long-term return potential. This means that the investors will have to accept a higher level of volatility, and as with any other investment, it’s about balancing it against rewards.
Tips for Success
The main thing to keep in mind is that this isn’t about following the returns on a day-to-day basis. When choosing how to diversify and choose assets, it may be useful to hire a consultant to help you out. They don’t need to follow the portfolio on a regular basis, but they can help establish it.
Bucket 3: The Experimental Investments
The third bucket is made for exploring innovative investments that can potentially have big rewards. It’s also the one that is made for short-term and quick profit, and therefore, the one with the biggest risks. The investors should focus on this bucket once the other two are secure.
Examples of Experimental Investments
- NFTs or Web3 projects
- Angel investing in early-stage startups
- Viral digital products or courses
- Crowdfunded real estate or business ventures
Key Characteristics
This bucket is characterized by high risk and high reward. It usually has immediate returns and a potential for massive growth. It can also provide no returns and result in a very quick loss. Therefore, the only investors who can try their hand at this type of passive income are those who are willing to accept potential losses.
Tips for Success
The only tip to remember about the third bucket is to invest only what you’re willing to lose and that if a proposition seems too good to be true – it probably isn’t.
How to Balance the Buckets?
There are no clear rules as to how to divide your assets between these buckets, and it mostly depends on the stage of an investor’s career and life. Younger investors who have plenty of time to recover should put more into the third bucket, but those preparing for retirement shouldn’t risk too much of their savings.
- By the age of 35, it’s best to go with 20 percent stable, 50 percent growth, and 30 percent experimental.
- By the age of 50, it should be 40 percent stable, 50 percent growth, and 10 percent experimental.
- Those over 50 should allocate 70 percent in the stable bucket, 25 percent in the growth bucket, and 5 percent in the experimental one.
Conclusion
The 3-bucket system is a common way to divide assets made for passive income based on how risky they are. That way, the investor keeps earning with the sudden changes in the market. The assets put into different buckets are also diversified by industry and company but put together based on how volatile they are.
As the investor grows older, they should allocate their resources so that there’s less risk involved. This approach can be handled by the investors themselves or with the help of a broker.