If you’re not big into modeling financial spreadsheets or using hard to manage budgeting software to organize your finances, there is a simple yet effective type of budgeting that may work for you.
It’s called the bucket budget, and it doesn’t require any expensive software or online budgeting tools.
The bucket budget is a very simplified and stripped down financial plan that really oversimplifies budgeting, but can still keep you on track with your finances. Here’s how it works.
How to Create a Bucket Budget
Getting started with a bucket budget is easy. You set up three seperate accounts that will be used to allocate your monthly income into three categories. The categories are for non-discretionary spending, savings, and discretionary spending.
Savings Account. The first account you should set up will be a savings account. This will be used to save money for your emergency fund and also for your retirement, kid’s college fund or any other savings accounts that you wish to build. You’ll want to choose a percent of your income that you wish to save and allocat it to this account. We recommend that you put at least ten percent of your income into this fund. Since this will be your emergency fund also, you’ll need to make sure to fund it well enough that you won’t run out of money if some unforeseen expenses come up.
Non-Discretionary Spending Account. The first of your accounts should be designated as a non-discretionary spending account. This account will be used to pay for fixed expenses and for expenses that are not optional. For example, your monthly mortgage, rent, insurance, car payment, and utilities. You’ll need to go through a month’s worth of bills and pick out all of them that are necessary. Then add the total for all these bills up and this is the amount of money you’ll need to contribute to this account each month. Make sure that you account for non-monthly expenses like insurance, property taxes and other semi- or annual bills. Also, remember that just because these expenses are non-discretionary doesn’t mean that you can’t work to reduce them. For example, insurance rates can be improved, your mortgage can be refinanced, your rent can be reduced if you move to a less expensive apartment, and so on.
Discretionary Spending Account. The final account will be for all of your discretionary spending. To compute how much money goes into this account, you start with your monthly take home pay, then subtract your savings and non-discretionary accounts from it. This leaves you with the leftover money that you can use on non-essential things. The type of expenses that fall into this part of your budget are things like TV, dining out, entertainment, shopping, clothing (clothing could be in either category but most people buy more than they need), vacations, coffee, snacks and most anything else that you spend money on.
Once you have computed the amount of money to deposit into each account each month, you should have your employer direct deposit the three different amounts directly into the accounts. If you can’t do this, make sure an do the transfer yourself, or set up an auto transfer in your online banking each month.
From this point on, you simply use the account that corresponds to your expense. When you sit down and pay bills each month you will pay them mostly from your non-discretionary account. When you go out to dinner or pay off most of your credit cards, you will pay them from your discretionary account.
If you run out of money in your discretionary account and there is still a week before your next paycheck, you need to stop spending. Hopefully, you’ll be able to spend less and maybe even significantly less than your discretionary account contribution. If so, you can bank the money toward the next month. Spending less for several months can leave you with a surplus that you can use for bigger discretionary expenses like vacations, new furniture, or maybe the latest iPad or gadget that you want to splurge on.
In summary, using a bucket budget like this may be oversimplified and it won’t work for all people, but give it a try and it might just work for you. Be clever, and find ways to manipulate this type of budget into something that you can easily live by and that can help you get your personal finances in order.