Managing Money with Three Pockets: Mastering Cash Flow for Wealth Building

💰 What Do You Do When You Suddenly Need Cash?

"I got into an accident." "My air conditioner broke down in the middle of summer." "A medical bill for $7,000 just came out of nowhere."

Life throws unexpected expenses at you. How can you know when your refrigerator will break or when you'll accidentally scratch your car? That's why you need to keep some cash reserves.

Today, I'll show you how to manage your assets using three pockets.

👛 Dividing Assets into Three Pockets

Pocket #1: The Flow Pocket

Pocket #1 is where money comes in and goes out.

Your salary goes here
Credit card bills come out of here
Fixed expenses like rent, utilities, and phone bills get paid from here

Ideally, this pocket should have minimal money while constantly flowing in and out.

Pocket #3: The Investment Pocket

Pocket #3 is your investment assets.

Stocks
Bonds
Gold
ETFs

Our goal is to keep growing Pocket #3. By tracking the flow in Pocket #1, you should regularly move any money that doesn't need to be there into Pocket #3.

Pocket #2: The Emergency Fund

Pocket #2 sits between #1 and #3. This is today's key focus.

Pocket #2 is for:

Unexpected emergencies (accidents, repairs, etc.)
Expenses that don't occur monthly but need lump sums once a year (vacation, holidays, etc.)

Based on your spending level, keep a certain amount set aside here. For some people it's $2,000, for others it might be $15,000. Everyone's different.

🎯 The Real Purpose of Pocket #2

Pocket #2 has one crucial purpose:

To protect Pocket #3 from being touched

When the AC breaks, the car needs repairs, or unexpected family events come up, you use Pocket #2. This means you never need to touch Pocket #3 (your investments).

When Pocket #2 gets depleted, here's what to do:

When moving money from Pocket #1 to Pocket #3
If Pocket #2 is low, replenish #2 first
Then add to #3

This order matters.

📊 The Ideal State of Three Pockets

Early in your career:

#1 and #2 are small
#3 is also small

As you age and advance in your career:

Income grows, so spending grows somewhat
#1 and #2 grow to a certain extent
But #3 grows much faster

Because only #3 compounds. This is ultimately how you achieve financial freedom.

🏦 Where Should You Keep Pocket #2?

You don't want to invest Pocket #2 since you need quick access during emergencies.

But rather than a regular checking account, consider products like money market accounts (MMA) or money market funds (MMF) that offer slightly higher interest.

There may be restrictions like banking hours for withdrawals
But the interest is a bit higher

Since Pocket #2's purpose isn't to transfer money at midnight, managing it in an MMA works well.

What does cash allocation really mean?

It's not "what percentage of my assets is in cash." It's having the amount you need in Pockets #1 and #2.

🛒 The Secret to Buying the Dip

The stock market occasionally crashes due to external factors. A single comment from Trump can cause a 2-3% correction, and tariff announcements have caused even bigger drops.

When this happens, don't you want to scoop up bargains? It's like a limited-time sale!

That's why I keep some cash set aside for these opportunities. When things suddenly drop, thinking "maybe I should buy some" is actually fun.

Caution: This applies to people with substantial assets who've watched markets for a long time. Not recommended for beginners.

Honestly, nobody knows if a drop will be temporary or lead to a rebound. You'll never catch the exact bottom. But when drops happen due to external factors (like a Trump comment), it's completely different from a drop due to actual business problems. Long-term, stocks bought during those dips have all been profitable.

🚨 When Pocket #2 Isn't Enough?

"My Pocket #2 is $3,500, but my medical bill is $7,000."

Then you have no choice. You'll need to use Pocket #3. The answer is clear.

But think about it this way:

Because you diligently saved in Pocket #3
At least you don't need to take out a loan

And ultimately, this is what you're investing for anyway. Retirement costs aren't just about drinking fine wine in your later years - they're also about covering healthcare expenses when you get sick.

📈 What the Numbers 1, 2, 3 Really Mean

Thinking about it, 1, 2, 3 aren't just numbers. They represent the priority of what you touch:

Pocket	Characteristic	Priority
#1	Money that constantly flows	Touched most often
#2	Emergency fund for urgent times	Occasionally touched
#3	Investment money to not touch	Rarely touched

#1 flows back and forth anyway, and #3 should stay untouched as much as possible, which is why it's at the bottom.

💡 When Income Grows, What Should Grow?

When income increases, spending naturally increases too. But!

Spending shouldn't grow proportionally to income. Investment should grow proportionally to income.

This way, Pocket #3 keeps growing and builds a solid foundation for your life.

When I say this, some people ask "So am I supposed to save my whole life?" No. You should buy nice things occasionally. But think about what real self-investment is.

🎁 What's the #1 Real Investment in Yourself?

Much of our spending is for others. A lot is for showing off to others.

But the #1 real investment in yourself is investing.

What better way to invest in yourself than building assets? Buying nice clothes is fine, but that same money in an ETF could be worth much more in 10 years.

✨ Key Takeaways

Divide assets into Pocket #1 (living expenses), #2 (emergency fund), and #3 (investments)
Pocket #2's purpose is to keep you from touching #3
When #2 drops, replenish it before adding to #3
Cash allocation isn't a percentage - it's having what you need in #1 and #2
When income grows, grow investment, not spending

The three pocket system - simpler than you thought, right? Start dividing your money into three pockets today. You'll have clearer cash flow, and you'll feel your investment pocket growing steadily. 💪