Adopting The Bucket Budget

So you want to budget. In fact, you know you need to budget. But you don’t have the discipline and/or desire to track all of your expenses. What do you do then?

As I pointed out on Tuesday, tracking every penny doesn’t work for most people. It doesn’t even work for every person in my household. Ben couldn’t care less about tracking. He humors me and reviews the joint spreadsheet that I create every month. But he’s satisfied, as long as he has enough money to contribute to our joint expenses, save the necessary amount to meet our retirement goals, and buy stuff for himself.

Ben’s approach is what I call bucket budgeting. Instead of creating specific categories and keeping your spending within them, you start with the money that you have and split it into general buckets of money (figurative, not literal) and keep your spending within those lump sums.

For example, Ben has three buckets of money that he contributes to monthly. His first is for our joint expenses, which we contribute based on percentage of household income. Second, is the retirement budget, which we also approach using joint retirement goals. Lastly, he has the rest of his money for himself and doesn’t worry about where it goes. If for some reason, he doesn’t have money at the end of the month to buy new music or book, he won’t until his personal bucket fills back up. It reminds me of the envelope system or Elizabeth Warren and Amelia Warren Tyagi’s  50/30/20 budget. General categories but no specific spending patterns.

If this approach appeals to you, you should definitely try it out. However, keep a few things in mind before you set up your system.

Start with an accurate income figure

Even with this type of budget, you need to know what you have as far as your income. Working for someone else makes this step simple. Take your net income (i.e., your income after taxes and deductions like health insurance and your retirement) per paycheck and multiply that by that by either 4.3 if your paid weekly, 2.17 if paid biweekly, or 2 if paid twice a month. No need to multiply by anything if you’re paid monthly.

 Working for yourself increases the complexity of this step because of the fluctuations in your income. In that case, you can either 1) take an average of your last couple of years of net business income (your schedule C on your tax return), or 2) adjust on a monthly basis, leaving a bucket for overflow savings.

You need to keep your buckets separate.

The other important part to this type of budgeting is keeping your buckets separate.

First, make sure you meet your fixed, necessary expenses – your rent, utilities, groceries, debt payments, etc. Don’t forget those fixed expenses that don’t occur every month like car insurance or life insurance.

You should also have a savings bucket, which includes 10-20% of your income. You can further split this bucket into 3-6 months of expenses for emergencies and the rest for retirement.  Many people tend to forgo this bucket, but it’s the most important of the three. Having an emergency fund will help sustain you during an unexpected bill, and you have to start saving for retirement as early as possible to make sure you get the most out of your contributions.

After you have figured out your fixed expenses and your savings, you subtract those amounts from your monthly income figure. You can use the remaining money for discretionary expenses like clothing, eating out, and gifts. Spend it on whatever you like, as long as you don’t dip into your other buckets .  If you find yourself without enough money to live the life that you want, you have to either cut your fixed expenses or find a way to make more money (don’t touch your savings!)

The approach takes discipline

While you will find this approach easier because you don’t have to track every penny, it will still take discipline to keep from overspending. You will likely be tempted to take from next month’s fixed expenses or use a credit card when you’ve run out of discretionary cash but still want to go out with your friends. You can avoid this problem by paying for everything in cash or on a debit card. Or you can use separate credit cards with low limits that you can pay off every month.

I think this approach provides a great alternative for those who don’t want to worry about keeping track of every expense. I see it work on a monthly basis and know Ben enjoys the freedom this approach gives, while still meeting his money goals.  Hopefully this approach can provide some of you with that same satisfaction.