You know you shouldn’t spend more than you make. You may feel intuitively that you’re wasting a lot of money on inessentials. Yet the last thing you want to do is spend your leisure time entering in receipts for every latte you drink or every pair of socks you buy. How can you get control of your spending without dedicating your life to it?
First, let’s state the obvious. Tracking every penny doesn’t work for a lot people. It doesn’t even work for every person in my household. My husband Ben couldn’t care less about tracking. He humors me and reviews the joint, color-coded spreadsheet that I create every month. But he’s satisfied if he has enough money to contribute to our joint expenses, save the necessary amount to meet our retirement goals and buy stuff for himself.
Ben follows an approach I call bucket budgeting. Instead of tracking everything he spends his money on, we created a system where he splits his money into buckets (figuratively, we don’t have actual buckets) and keeps his spending within those lump sums. This allows him to prefund his expenses, keep his spending in check and avoid having to track every penny, which I love but he hates.
In implementing this approach with clients, I start with three main buckets: 1. The Security/Safety Bucket. 2. The Dream Bucket. And 3. The Financial Independence Bucket .
As their names imply, each bucket serves a different purpose. The security/safety bucket holds the money that’s meant to keep you safe and secure, like your emergency fund and funds for paying down debt. Your dream bucket houses the money for goals that you have for your present — to buy a house or car, take a vacation or save for a child’s college. And the financial independence bucket contains the money that you will need for financial independence in the future — your retirement, living abroad, leaving money to charity.
This system is very similar to the envelope system or Elizabeth Warren and Amelia Warren Tyagi’s 50/30/20 budget. There are general categories but no specific spending patterns. You’re setting up a system the prefunds your expenses and does it in a way that gives you freedom and choice without the stress of tracking every little thing or constraining yourself to 20 specific categories.
This approach also assumes that you’ve assessed your values and goals around money. If not, start there. You can then use that assessment and this spending system to make sure that your spending your money on what means most to you. Here are the steps to setting up your system.
Start with an accurate income figure.
The first place to start with this system is your income. If you work for someone else, this step is simple. Take your net income (i.e., your income after taxes and deductions like health insurance and your retirement) per paycheck and multiply that by that by either 4.3 if you’re paid weekly, 2.17 if paid biweekly, or 2 if paid twice a month. No need to multiply by anything if you’re paid monthly.
Working for yourself makes this calculation more complicated, because your income fluctuates. In that case, you can either 1) take an average of your last couple of years of net business income (your schedule C on your tax return), or 2) adjust on a monthly basis, leaving a bucket for overflow savings.
Create your sub-buckets.
The other important part to this type of budgeting is keeping the buckets separate and setting up a system that fills them automatically.
From your income figure, you should subtract your fixed, necessary expenses — your rent, utilities, groceries, etc. Don’t forget those fixed expenses that don’t occur every month like car insurance or life insurance. Whatever is left over is what you’ll split between your buckets. And while you have three main buckets, it’s likely that you’ll have sub-buckets for your specific goals.
For your security/safety bucket, you’ll have your emergency fund that will hold three-to-six months of your living expenses. Many people forgo this bucket, but it’s the most important of the three. Having an emergency fund will help sustain you if you get an unexpected bill, and paying down debt will eventually create more freedom and choice for your dream buckets in the future. I suggest using a calculator to organize your debt and pay it down with the highest interest rate first.
A common question I get is which to contribute to first: debt or savings? I like to do them both at the same time. You can start by
reserving 10-20% of your net income for this bucket and split that amount between saving for emergencies and debt pay down. While it may not be as efficient as throwing all your money at your high-interest debt first, having the balance helps make sure your financial foundation is stable in case an emergency arises as you’re paying down debt. Your dream buckets get to be anything you want — a vacation, saving for a house, moving. You’ll have to estimate how much these things will costs and set a different spending goal for each bucket. I like using goal timelines and getting as specific as possible of the approximate costs. Also makes sure to have a bucket for your discretionary expenses (eating out, clothing, entertainment, etc.). You don’t have to keep track of what you spend in this bucket. But once the money is gone, you can’t spend any more until the next month.
Prioritize your spending.
Seeing all of these buckets together will help you prioritize and balance your spending. Those priorities may shift or completely change over time. And even if you’re not funding all of the buckets right away, seeing them will help keep you motivated to do what you can to start funding them as soon as possible.
The important part is to keep them distinct and set up the money that you want to go to the buckets automatically so you don’t have to worry about comingling the funds. As far as distinguishing your buckets, banks like Ally and Simple allow you to set up multiple savings accounts or subaccounts and label them for your specific goals.
The auto-funding also works well for couples who are contributing different percentages of income to joint expenses. You’ll know how much goes into each of the buckets, and you can contribute the agreed on percentage to each.
Before you know it your buckets will start filling, and you’ll have switched your approach to conscious spending, rather than spending unconsciously and hoping there will be enough money to pay for everything.
Some parting thoughts.
A bucket budget approach may seem easier because you don’t have to track every penny, but it still takes discipline to keep from overspending. You may be tempted to borrow from next month’s fixed expenses or use a credit card when friends call about drinks and you’ve run out of discretionary cash. You can avoid this problem by paying for everything in cash or on a debit card. Or you can use separate credit cards with low limits that you can pay off every month.
I think this approach provides a great alternative for those who don’t want to worry about keeping track of every expense. It’s also a good tool for behavior change for those that have trouble with spending.
I see it work on a monthly basis, and I know Ben enjoys the freedom this approach gives, while still meeting his money goals. I also love that focusing on the specific spending patterns he needs to employ to achieve his and our goals helps prevent him from getting overwhelmed by trying to manage so many aspirations at one time. I’ve seen it work for my clients in much the same way. I hope it can provide some of you with that same satisfaction.
Remember that budgeting is about intention not restriction. You’re creating a spending plan to ensure that you use your money in a way that you want to. Reminding yourself of that periodically should help keep you on track.