Monday, December 26, 2011

Organization Tip: Bucket Budgets

Trying to organize finances can be frustrating and stressful.  Budgets are about as much fun as dental work, but how can we track our spending without them?

My solution is a percentage budget, or what I call my Bucket Budget.  It has been such a huge stress relief for me that I thought I'd share it.    

The details of percentage budgets vary, but the general idea is the same.  Your income (based on gross or net) is divided into three or four categories or "buckets" of money:
  • taxes (if basing on gross income)
  • savings
  • living expenses
  • fun money

As long as money is going in and out of the appropriate buckets, you don't need to track every dollar.  And if you set it up so your buckets don't mix, it's like putting your finances on autopilot.

To get started, determine how much money you need for your living expenses, which include all of the basic costs of living -- mortgage or rent payment, transportation, utilities, food, etc. -- that you have to pay every month.  Base this amount on recent spending history.  BE REALISTIC.  Add a little for contingencies if you want.

Whew!  That concludes the complex calculations portion of this process.  You can use round percentages for the other categories.  Let's say your net income (take-home pay) is $3000 per month.  You've determined your living expenses are $2100, or 70% of your monthly pay.  That leaves 30%.  Most financial experts I've read suggest putting 20% into savings, so we'll go with that.  That leaves you with 10% ($300) for you to spend on whatever you want.  In summary, your breakdown is
  • savings 20%
  • living expenses 70%
  • fun money 10%

Now to put those finances on autopilot.  Set up two or three bank accounts:
  • savings
  • checking for living expenses
  • checking for fun money (you can skip this if you prefer to use cash for your fun money)

When you receive your paycheck, divide the money into the appropriate buckets.  You can use direct deposit from your employer or set up recurring transfers to make this completely automatic.
  • deposit 20% ($600) into your savings account
  • deposit 70% ($2100) into your living expenses account
  • deposit 10% ($300) into your fun money account (or take it as cash if you prefer)

Because your setup is automatically covering savings and living expenses, you can spend your bucket of fun money -- every cent if you want to -- without worrying about how it's going to impact your financial situation. :D

Your budgeted percentages may vary depending on your personal financial situation and goals.  If you live outside the U.S., you might need to change the categories.  But I think the general principle can be useful in most cases.


  1. No, budgets aren't fun, I totally agree. I plan my expenses in almost the same way. I have an extra category for insurances (health, car, apartment, dog...).

  2. Financial problems are the bane of my life! I frequently find myself seriously wondering how little food I can live on so I can fund the buying of new boots and various other pretties. I'm going to try this technique. :)

  3. Sal Kaye - Separating insurance would especially make sense if the costs were optional. My employer pays health insurance and my homeowners is included in my mortgage payment, so I just lump my insurance costs in living expenses.

    Melarune - It definitely requires that you take a realistic look at how much you need for living expenses and then make a commitment not to dip into those funds for fun money. But after that, there's no reason to agonize over spending decisions. Either the fun money is there or it's not. It sucks when the money isn't there, of course, but I think sometimes it's the inner argument ("Do I *really* not have the money? Maybe if I did this or that...") that's the real source of stress. Good luck! :)