The Bucket Budget

Mon, May 18, 2009

Are you interested in creating a bucket budget? There is some buzz going around about this technique to budgeting. This may be a great start for those who want to get on a budget to save money and accomplish their financial goals! It’s easy to set up and manage as you will see below.

Here’s how a bucket budget works

Set up three bank accounts (two checking and one high yield savings).
Figure out how much of every pay check you want to put towards savings and have that automatically sent to the savings account.
Send the rest of your pay check to checking account 1. Pay all monthly fixed expenses (standard bills such as mortgage, utilities, internet, etc.) out of this account.
Figure out your monthly surplus after paying fixed expenses and divide by four (approximately 4 weeks a month). Set up a weekly transfer from account 1 to account 2. This is for variable expenses such as groceries and entertainment.

Follow two rules

You can’t transfer more money over until the next week (no cash advances for variable expenses).
You can’t use credit cards.

There are a lot of possiblities with this approach. Consider the below practical ideas

Give or tithe and pay extra on debt out of account 1. Make these fixed expenses!
Use the savings account until you’ve saved up $1000 emergency savings. Once established, send that money into account 1 to pay extra on your debts.
Once you get the hang of the approach and start living off account 2 for variable expenses (remember the two rules), try dividing the money for account two into specific spending categories. Start managing how much you’re going to spend for entertainment and other variable expenses to help prevent over spending.

Recap of the bucket budget

Savings Account: Automatic transfer from your pay check for savings. Forget about the money in this account.
Checking Account 1: Remaining amount after savings automatically sent to this account for fixed expenses (include giving and debt reduction payments out of this account).
Checking Account 2: Remaining amount after fixed expenses automatically sent to this account for variable expenses.

Do you think you could use this approach to budget your money wisely?

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