I use a financial bucket system instead of a budget. I’m not a great fan of budgets, as I find them inflexible and restrictive. Budgets that are too granular, that is, drilled down to specific spending categories, don’t consider the fluctuations in spending patterns and needs.
The financial bucket system is a way to allocate the money you receive in regular incomes, such as salaries.
The bucket system isn’t a budget, per se, although at the very top level you are restricting your spending overall.
What is a financial bucket system?
The financial bucket system is a method to allocate your income into 5 or 6 broad categories, such as living expenses, savings, giving, debt repayment and fun spending. Whereas a traditional budget you would allocate funds to go towards specifics, such as utilities, food, transport etc. I’ve tried traditional budgeting, even Dave Ramsey’s envelope system, but found it unworkable.
If there was, for instance, a spike in the gas bill, you would have to find those funds from another category, thereby robbing Peter to pay Paul. Averaging out the bills over the year, is also not feasible. Where would you keep the additional income you keep, during low months? It just wasn’t workable.
In the financial bucket system, the regular monthly household expenses can be allocated to one large bucket. This bucket is your living expenses. Here’s how the system works.
The 50:10:10:10:10:10 financial bucket system
When you receive your monthly salary, divide it into 6 buckets, most online bank accounts will allow you to set up separate current account for this purpose.
Living expenses
This can usually be your primary current account. You will allocate 50% of your income into this account for living expenses. This is what you will pay all those regular bills with.
Savings
Next remove 10% of your income into a savings account. This account will be used to pay for longer term expenses, such as an annual holiday, Christmas, or car insurance if you pay it off in one. This account should be used for predictable but irregular expenses, those expenses that you know you will need money for.
Emergency fund/Investment
The next 10% will go into your emergency fund/ investment fund. This fund will never be used except for, you guessed it, emergencies or for investing in assets.
If you don’t have an emergency fund already, then aim for 3-6 months living expenses saved up, never to be used except for emergencies. What are emergencies? Not holidays, treats or for when you are running short. No, an emergency would be something like an unexpected car repair, new boiler or medical issue. You could also earmark this money, if you suddenly lost your job, so you could live off this fund for 3-6 months until you found a new job.
It would be even better if you set up a separate savings account, with a separate bank, where it is not as easy to withdraw the money. Set up a monthly standing order to transfer this money on payday, automatically.
Once you’ve reached 3-6 months living expenses, you can use the money you are transferring every month, into an emergency fund, to go into a investments. As you won’t be using this money for a long time, you can let compounding take effect, to grow this nest egg. What investment you purchase will be personal to you and you should take independent financial advice on where to invest. Some examples could be an Index Tracker fund or property.
Debt repayment
The next 10% bucket is your debt repayment plan. Use this 10% to pay off debt over and above your regularly monthly payments. See my post on debt repayment, where I describe the Debt Snowball method.
Giving
There is something almost mystical that happens when you give money away, with no strings attached. I don’t know how it works but the money seems to come back to you in other ways. It’s almost like a reward. Of course, this shouldn’t be your motive for gifting, but if you can set aside a percentage of your income, up to 10% for gifts and worthy causes, that you care about, you will see the benefit as well as doing good in the world.
Often people want to gift money but put it off because they think they can’t afford it. Actually, the reverse is true. If you gift the money anyway, you will soon find you have more than enough.
Fun
The final 10% will go towards fun. This bucket is for treating yourself. In the other buckets you’ve taken care of your living expenses, long-term savings, gifting, investing/emergencies and reducing debts. This last bucket is just for you. People will either splurge on themselves with money they don’t have, or they will go the other way and begrudge spending any money on themselves. The beauty of this bucket is that you can use a finite amount of money, to spend on whatever you want without guilt.
Better – 50:20:10:10:10
Once you’ve paid off your debts, using the 10% debt bucket, you can transfer this 10% to another bucket, because you will never get into Bad Debt again. I would recommend transferring this into your Emergency/Investment bucket, so you can really accelerate your wealth accumulation.
Start small if you can, but build it up
If you’ve never done any budgeting at all, then allocating your income into buckets of 10% may seem a big stretch at first. If that’s the case, then set up the buckets anyway, but then start smaller and build up to 10%. Perhaps start with 1% and add another 1% each month until you reach 10%.
What will happen when you use the Financial Bucket System?
There are several things that will happen once you’ve started and used the Financial Bucket System for some length of time, which at first seem counterintuitive.
You won’t miss it
Firstly after a few months of doing this, you will not miss the diverted money. You will quickly get used to living off 50%.
Capital will grow
If you track your net-worth (as I recommend), you will not notice much of a change at first. However, if you persist, over the years you will be astounded by how much it starts to grow and compound.
Your income will increase
I don’t know how this happens, but it does. All I can say is try it.
You will be more discerning and disciplined.
Your spending habits will change and you will come to respect money. This means you will be less likely to waste it. You will be more discerning about what you buy and when. Rather than buying on impulse, you will wait to purchase something. Often this means that you won’t purchase the item because the impulse goes away.
All in all, I can thoroughly recommend using the Financial Bucket system. It certainly helped me turn my finances around.