Many people have heard about the envelope system for budgeting. With the envelope system, your household creates a budget divided into important spending categories. Then, the amount allotted to each category is placed in an envelope at the start of the month. When the money runs out in the envelope, you’ve exhausted your spending in that category for the month—and the strict nature of this budgeting plan can be a great guideline for individuals who struggle to stick to budgeted limits.
While the envelope system can be an effective budgeting tool, it’s also become outdated as more and more purchases and expenses are paid for with credit or debit cards, including online purchases. To alleviate the complications created by a cash-based system, many consumers are now turning to the bucket system to set and manage their budgets.
Interested in learning how to use these personal finance buckets to control your spending and reach your savings goals? Here’s a brief overview of this budgeting system.
Just like the envelope system, your monthly income is divided into separate funds dedicated to each spending category. Instead of placing cash in envelopes, you can set up separate savings accounts as “buckets” for each spending category.
These savings account buckets can be drawn from whenever you’re making purchases that suit this category. With savings accounts instead of cash envelopes, you can manage these buckets and their corresponding payments through debit card charges, transfers or payments to your checking account and/or credit card account, and cash withdrawals from an ATM.
The bucket saving system offers a number of benefits and conveniences to improve your money management practices. These include:
When setting up your bucket saving system, you have a few different options to manage your accounts. One option is to set up different savings account for each spending bucket—which can mean setting up potentially dozens of savings accounts.
If this first method seems too difficult to manage, another option is asking your financial institution if they support sub-accounts. Sub-accounts are a simple feature that lets you create sub-savings accounts by using special tags to categorize money. If you deposit $200 into your general savings account but want that money earmarked for entertainment, a sub-account lets you categorize those funds accordingly—making it easier to charge purchases or make withdrawals that are tagged to those funds.
If your bank doesn’t offer sub-accounts, one alternative to creating separate(savings account buckets is to place money into one account and simply track your spending manually. While this can be an arduous task, a money management tool can connect to your online bank account and help you categorize and track spending with ease.
While the bucket method was initially designed to help individuals and households save toward important savings goals, some consumers and financial experts have also used this savings method to guide retirement planning. By using the bucket system, investing is prioritized according to different retirement goals separated out into distinct buckets.
One bucket might be dedicated to cash reserves to keep on hand during retirement. Other buckets might be dedicated to specific retirement goals, such as a travel budget and/or vacation home. Buckets may also be set up to organize investments by type and/or risk level, such as buckets dedicated to annuities and other conservative sources of income, to a bucket representing stock investments.
While most of these buckets won’t make use of savings accounts, the buckets themselves can still be a valuable tool to monitor withdrawals from different funds to make sure money is being managed wisely and sustainably.
