Bucket your money.
Before credit cards and online banking, people used jars or envelopes to divide their cash into different spending categories.
These methods of “bucketing” monthly income were a way to keep track of your hard-earned cash and to control your spending. When the “food” bucket would run dry, you ate spuds until the next payday. If there was food money remaining at the end of the month, you could treat yourself to a nice restaurant — guilt free.
Most of us still need “money buckets” to help control our financial lives. Without them, it’s difficult to set savings goals.
If, say, you expect to pay $300 for a season ski pass, you could deposit or transfer $25 each month into an account you’ve named “Ski pass.” A year later, the money you need for the ski pass is ready with almost no effort. For larger items, such as a $3,000 Disneyland vacation, you would set aside $200 a month. In 15 months, your vacation would be fully funded.
Here are five advantages to bucketing your money automatically at your bank or credit union:
- Adds to your account slowly and evenly, so you don’t have to go into debt if an emergency strikes.
- Distributes your income before you can spend it.
- Limits the security risk of cash lying around.
- Earns interest or dividends.
- You can change the purpose of the account at any time.
Here’s how to get started with your “money buckets” or savings accounts designated for a specific purpose:
Step 1: Establish your emergency fund.
Money buckets work best if you first establish an emergency account of three- to six-month’s income to cover unexpected expenses. That removes the temptation to tap into your other accounts or high-priced credit cards when an unexpected event –- job loss, medical bill, major car repair, and so on -– occurs.
“If you need $1,200 for the holidays, it shouldn’t come out of your emergency savings,” says Anne Hagman, an STCU community relations officer, “it should come out of your ‘holiday fund’ or bucket, where you add money each month. If setting aside $100 a month to fund the account is too difficult, then perhaps you should pare back on Christmas spending.
Step 2: Name your accounts
If your online banking system won’t allow you to do it yourself, then visit your credit union or bank office and ask for help assigning names to your savings accounts, where you can add a few dollars each payday.
Name your accounts anything you want to help define the purpose of the “bucket” fund. You could call one “Disneyland” and another “Granite countertops,” or one “Nancy’s wedding” and another “Harley.”
If it helps, use the money bucket system for recurring expenses too. Label your “buckets” as “Animal care,” “Utilities,” “Property taxes,” and so on to help you set aside a few dollars each month for regular bills.
Step 3: Fill your buckets automatically.
By using automatic deposit and transfer to fill your “buckets,” soon you’ll learn to live without those dollars until you need them.
Ask your employer for help setting up direct deposit of your paycheck to your bank or credit union. Then, request that your credit union or bank automatically distribute a designated amount from your paycheck to your designated savings accounts to help build your “buckets” for future needs.
You can always change the purpose of your savings accounts, rename them, or stop the automatic transfer.
But once you experience the freedom of funding future goals over time, you may never want to stop filling those buckets. You may want to add more!