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- If you’re looking for an easy way to budget your money, financial planners recommend "bucketing."
- Separating cash into different "buckets" for specific purposes — retirement, travel, or an emergency fund — allows you to clearly see how much is going toward each goal.
- Setting up automatic contributions can make funding each bucket, or account, virtually effortless.
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Budgeting shouldn’t be scary.
It’s just a decidedly unfashionable term for organizing your money in a way that helps you cover expenses, avoid consumer debt, and save a portion of your income to fund whatever goals you’re working toward.
To make it all less confusing to keep track of, three financial planners told Business Insider they use a method called "bucketing."
Luis Rosa, a CFP who founded the financial-planning firm Build a Better Financial Future, said you can start off by making a list of your fixed expenses, including housing costs and other recurring monthly payments, and variable expenses. Rosa suggests including savings in your expenses column. Then put "goal-specific money" — think: funds for a vacation, wedding, or down payment on a house — in various "buckets."
"By breaking them up into different accounts or buckets, you get to keep better track than if you lump all the money together," Rosa said.
Setting up the buckets is step one. Step two is figuring out how much you can afford to contribute to each goal and then set up automatic transfers from your paycheck or another, more general savings account into that "bucket."
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There’s something to be said for separating savings into a different bank account, or even several. I opened an Ally account a few years ago with a small initial deposit strictly to build up my emergency fund. After a year of automatic contributions, my account balance nearly doubled. Since my checking account lives at a different bank, I was rarely tempted to dip into my emergency fund. Out of sight, out of mind.
Anjali Jariwala, a certified financial planner and certified public accountant at Fit Advisors, told Business Insider she also sets up automatic monthly contributions to different "cash buckets," either a checking or high-yield savings accounts, to fund different goals.
Andrew Westlin, a CFP at Betterment, said bucketing money into different accounts helps him "clearly see what portion of my assets will be used for each objective — my emergency fund, retirement, and money set aside for a sabbatical in a few years."
Westlin added: "I’m not an obsessive planner, so I even like to put extra money each month into a ‘just because’ bucket — I could use it for anything, and that freedom is exciting for me."
Rosa said he likes bucketing because it makes tracking savings progress even easier.
"This also helps with the motivational aspect of staying the course," Rosa said. "Some days when you ask yourself ‘Why am I working so hard?’ you can see how much progress you’ve made toward a future goal and it reinforces the behavior. You’re more likely to stick to your goals if you can track its progress."
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See Also:
- The first 3 things to do with your money when you get a raise or bonus
- I’m a financial planner — here’s the single best piece of advice I can give you about money
- Millions of Americans are ignoring an important tool for retirement planning that only takes seconds to find
Source: Business Insider – tloudenback@businessinsider.com (Tanza Loudenback)