Dubai: When it comes to managing money, a method involving ‘buckets’ has become increasingly prevalent with some finance authors in particular having popularised the term. However, the technique in itself isn’t entirely new.
‘Bucket budgeting’, sometimes referred to as ‘bucketing’, is basically a modern version of ‘envelope budgeting’. The key difference between the two is that with bucket budgeting, instead of setting aside cash in envelopes for regular spending, you set up targeted savings accounts for various savings goals.
Although pretty basic, this age-old method of budgeting helped many make sure they had enough money set aside to cover the essentials without making use of spreadsheets and online banking.
How does ‘Bucket Budgeting’ work?
The idea is to set up multiple bank accounts called ‘buckets’ and use each one for a specific purpose, like bills, savings or entertainment. Once your buckets are set up, it’s easier to see and control how you spend and save your money.
If you’re not good with money and struggle to save, then bucketing could work for you. Many use it to reduce debts, control spending and achieve bigger goals, like buying a home or saving for retirement.
Bucketing can also help you save your money for larger but infrequent bills like car registration, school fees and energy bills. Even though each of these purchases may be perfectly valid reasons to dip into savings, it's tough to know if you're making good choices with your money if it's all in one place.
That's why bucket budgeting would have you create sub-accounts for your savings, each with a different savings goal. With this system, you have a better sense of how much is available to spend.
How do I group my spending into categories?
Group each category of your spending into a few themes such as regular and daily expenses, spending money and savings, then add up the total amounts in each theme.
These themes will become your buckets or accounts. You can have as many buckets as you like but here’s an example of how to group them:
Bucket 1 - Regular and daily expenses
This is for regular bills, rent, mortgage, debts, groceries, transport, school fees, insurances and holidays. This account should be linked to a debit card.
Bucket 2 - Spending money
Use this bucket for fun money to splurge on things like socialising or treating yourself and others. This account should be linked to a debit card.
Bucket 3 - Emergencies and safety money
This one is for the big or unexpected expenses that can catch you off guard, like home or car repairs, dental work or paying off debts. This account should earn interest and have no debit card, so you’re not tempted to spend.
Bucket 4 - Savings
Use this to put aside money for things like travel, a new car or reducing debt. Ideally this should be an account that earns interest and has no debit card.
How do I decide on the bucket amounts?
This is a very important part of bucketing. The idea is money from your income ‘pours’ into each bucket in certain amounts that you decide.
Ideally, all your income or wages should go into the first account, and from there you transfer money into each of your buckets.
As a guide, consider these percentages of your income for each account or bucket:
Account 1 - Regular and daily expenses: 60 per cent
Account 2 - Spending money: 10 per cent
Account 3 - Emergencies and safety money: 10 per cent
Account 4 - Savings: 20 per cent
It is also important to set up regular money transfers between your buckets now that you’ve worked out how much money goes into each of your accounts.
You can automate transfers from your first account into the others as it’s prudent to set up the transfers so they occur on the same day every month, soon after you get paid. This will help you avoid overspending on pay day.
Key takeaways
Also known as account bucketing, it’s simply another way of managing your money.
Briefly put, you split your money into ‘buckets’ (different accounts) to help manage where your money goes and to help with budgeting. You might have a bucket for everyday spending, bills, travel, and so on.
There’s no one size fits all approach to cash flow management and budgeting. Every situation is different and a case can be made for using online budgeting tools or a personalised spreadsheet.
The main variable that drives a successful system, is being proactive about what the objectives of the budgeting process are.
Essentially, this budgeting system works on the principle that when all of your money is in one place, it’s harder to track your spending – and easier to overspend.
But by breaking your spending down into different buckets you’ll have a better idea of what you’re really spending on essentials and where you might be able to rein it in.
