My grandmother used to say that you should never put all your eggs in one basket. She was right. As I see it there are three baskets into which you should put your eggs. I call them the security basket, the retirement basket, and the dream basket. The security basket protects you and your family against the unexpected (such as a medical emergency, the death of a loved one, or the loss of a job), the retirement basket safeguards your future, and the dream basket enables you to fulfill those deeply held desires that make life worthwhile.

This three-basket approach may sound simple, but don’t let that fool you. If you fill the baskets properly, you can create for yourself a financial life filled with abundance and, most important, security. In today’s blog post I’m going to give you a breakdown of the 3 baskets- how much you should be putting aside, where the money should be going and how to make it automatic!

The goal with your security basket here is to put away “rainy-day money” to cover expenses in case you lose your income. Exactly how much money you need to put away depends on what you spend each month.  I generally recommend to my students and clients that they put away somewhere between 3 and 24 months’ worth of expense money.

Now this 3- to 24-month range covers a lot of ground. What’s right for you depends in large part on your particular emotional makeup. Some of my students simply do not feel safe if they have anything less than two years’ worth of cash sitting in a money-market account. I happen to think that’s a bit excessive, but if that’s what it takes to make you feel comfortable, then by all means make it your goal.

Whatever amount you decide it’s important to put this money an FDIC-insured bank account (not your regular checking account but a separate one set up specially for this purpose). Until this emergency account is fully funded, you should have at least 5% of your paycheck directly deposited into it. If your employer doesn’t offer payroll deduction, arrange to have your bank automatically transfer the money from your checking account the day after your paycheck clears. To learn more check out my appearance on NBC’s Today show where I share my 6 tips for setting up an emergency account.

What’s a dream account? This is where you save the money that is going to pay for your home, car, wedding, trip to Hawaii, new boat, guitar, ski lessons, cooking school—whatever your dream happens to be. Most dreams require CASH, and because most people don’t have the cash, they either borrow to pay for their dream (whether by putting it on their credit cards or taking out an actual loan), or they never make the dream a reality. In some ways, your dream account is the most important account you will have because living your dreams is where the excitement of life really is. The best way to start filling this basket is to decide upon a fixed percentage of your income that you will automatically contribute every month. I usually recommend people start by investing 3%-5% of their after-tax income. As with your emergency fund, use either payroll deduction or your bank’s online bill-pay service to have a percentage of your paycheck automatically transferred into an FDIC-insured account set up just for this purpose. If your dream is at least three years away from fulfillment, start investing the money more aggressively once your dream savings total $10,000.

In my earlier blog post I explained the critical importance of paying yourself first—having at least 10% of what you earn deducted from your paycheck and deposited directly into a 401k, IRA, or similar qualified retirement account before the government takes its bite of withholding tax. Ideally, this deduction should total 12.5% of your income (the equivalent of one hour’s worth of work each day). But whatever you can manage, you must make the process automatic. The good news is that payroll deduction is a standard feature of most 401k plans, so as long as you’re signed up, your contributions will be automatically deducted from your paycheck.

If you’re not eligible for a 401k or similar plan and as a result use an IRA for your retirement saving, you’ll have to create your own automatic “pay yourself first” program. Tell the bank or brokerage where you have your IRA that you want to set up a systematic investment plan. This is a plan under which money is automatically transferred on a regular basis into your IRA from some other source (such as a payroll deduction). Most banks and brokerage firms will handle all the arrangements for you, contacting your employer’s payroll department on your behalf and dealing with all the paperwork. (If your employer doesn’t offer payroll deduction, you can have your retirement-plan contribution automatically moved from your checking account to your IRA—ideally, the day after your paycheck clears. Most banks have free online bill-paying services that allow you to schedule regular automatic payments of specified amounts to anyone you want).

I hope this blog post helped you gain a better understanding of the 3 basket approach to financial security and has motivated you to start funding all 3 – AUTOMATICALLY! Please leave a comment below or on my facebook page. I love hearing from all of you!

Live Rich!
David Bach


  1. Hi David,
    This sounds great, but what does one do when one is in a financial hot mess?? When the economy tanked so did our finances!! We were not prepared for that at all… And now, it seems, our only recourse is to go bankrupt just to reset our financial dial so we can start saving and re-building and just breathing again!! The sad part is that with the BK we lose our home.

    I definitely will start to implement your advices on finances once our BK is finalized. Thank you for all the sound advices and financial plans you post. It will definitely get me on the road to healing, building and breathing again.

  2. Thanks David, this is great. I have been struggling with how to save for all my needs simultaneously, and this really helps define how to do it. I had up to six “baskets” at one point and couldn’t possibly save for them all! Being an older single female who is far behind in her savings, I have a long way to go. But this is a great start – thank you much.

  3. Thanks David,

    My Ex-husband bought me “Smart Women Finish Rich” It was the best thing he could have bought for me. It is worth more to me than if he had given me $100,000. Somethings I was already doing and it re-enforced that I was doing thing right and it helped me get through some mental blocks on some other things.

    I have purchased this book for a few of my friends as well.

    Thanks again

  4. Excellent Reminder for us who have read your interesting Books!! Perhaps other options like Real Estate and factors like age of a person may have also guide others who have not yet read your superb books. They contain a lot of meat for all. Thanks very much and may God Bless you Infinitely.

  5. Thank you David. Thats another simple way of managing my money.
    Looking forward to hearing from you soon.

  6. Your advices has change the way I think about finances and money. I never knew what to do with my money, so I ended up expending it in a bad way. Now, I created a plan base in your advices and i now were my money is. Thanks.

  7. David,

    Great advice, but what if you are a single female, 66, retired living only on social security? Love your brainstorms.



  9. Thanks David, Have all of your books and you are the man!! We have been playing catch-up for the past 10 years for not saving in our early years and are getting back on track thanks to you. You have been an inspiration and we greatly appreciate all the great advice. Look forward to your next blog!

  10. Sound advice as always. I for one would love to see an elaboration on the 401(k) and advice for how to better manage my 401(k); it is too easy to just fill out an online form, let my employer deposit the money into the account for me, and then forget to review things like fund performance, fund alternatives, etc.

  11. Hi David,
    Wish you would come out with a plan for small business owners . Alot of small businesses make up the range of 10 or fewer employees, but because we are reinvesting back into the business for equipment and such we need some sort of automatic plan for us to save as well. What would you recommend?

  12. Thanks for sharing once again these strategies David. I started filling up those baskets last december after I read and listened to your message like 10X last year, I finally did it!! And best of all, I´m doing AUTOMATICALLY

  13. I am a small business owner too. In addition I am a single mom who has raised 5 children on my own. My youngest 3 are now in college. Yes, Three in college. I have spent years trying to pay down the debt that was left to me and have been fairly successful with many of your suggestions. Although in many ways I feel successful–I have 5 wonderful kids–their college is mostly funded with scholarships, my debt is dwindling and I have my own business. Still there is no savings, no retirement and no money for insurance. It seems impossible to even start the baskets. At this point I would be thrilled if I could do one. You do give me hope though that it is posible and a goal to work toward. I have read many of your books–try to catch you on TV and appreciate your emails. Thanks, David

  14. Hi David!
    I am very happy ever since i came across your books my life has changed,even the way i organise my life and also theway i save for the future has changed. I am currently reading your book Start late ,finish rich which i always consult for i am about to retire. i am over the moon with some of your email i always receive which have impacted positively on my life. God bless you, if only i had read your books earlier, i could have been a millioner long time.
    Best Regards

    H Lowani

  15. I love all your books and have been implementing the strategies for 3 years now. Savings, Retirement and Paying Bills is fun now!! I am looking forward to Attracting a life partner with a similiar philosophy.

  16. Great overview! My wife and I read “Smart Couples Finish Rich” and it has had a major impact. I have been able to increase my 401k from 5% to 11% in just a few months…best part is that I barely noticed the difference in my paycheck. Even got inspired to start blogging about my quest to retire early!

  17. Thank you so much, David! I am a huge fan and sincerely appreciate all the sound financial advice that you provide to everyone! Keep up the great work! Best, Lisa

  18. David,

    I have been following your tips for years and thank you so very much for putting out information that is easy to understand and implement. I have the ability to put $17,000 away pre-tax every year but you state to put 12.5% into a retirement account (I have been doing 20%). I think I already know the answer, but what should I do? Keep putting the same about away or lower my rate and pay off debt? Also, I agree with the person above that said we needed something for small-business owners. Thanks!