Budgets = F*** my life. @_@
Buckets = I slay! *^_^*
Budgets suck. Even just hearing the word budget can elicit a cold sweat on a hot summer night. No one ever really follows them, they're tedious, and -- my pet peeve -- they tell you about the past rather than give you insight into future decisions.
I *love* personal finance as much as I love wine with my girlfriends and pomksy puppies (too cute!). But I don't budget. Instead, I bucket.
Below, I'll show you...
How to Set up Buckets in three steps
two versions of bucket (for the employed and for the self-employed)
What is bucketing?
Unlike in budgeting -- where you use something that's not actually your bank accounts, like a spreadsheet or an app connected to your bank account(s), to track what you've spent in the past/retroactively -- bucketing enables you to set up your bank accounts themselves to connect and semi-automatically act as the proactive tracker of spending.
In other words, budgets are like retroactively tracking calories after you've eaten, and buckets are like proactive meal planning ahead of time.
In addition, buckets enable you to set and forget. You set up buckets up front and then it runs on it's own. You only have to recalibrate it when something changes significantly (you negotiate a raise, you pay off your loans, your rent changes, etc.). But, for the most part, you can set it and forget it.
HOW YOU SET UP BUCKETS in three steps:
1. Align (5 minutes)
Take 5 minutes to outline all of the big ticket expenses you can think of off the top of your head (like rent, car payments, student loans, etc.) and your money goals off the top of your head (like having 6 months of savings, saving retirement, paying off debt, etc.).
And really just take 5 minutes, you can always go back and refine it after you get the biggest expenses and biggest goals in buckets. You don't have to optimize right now; don't let perfect be the enemy of the good.
Here's an example:
Take another 10 minutes to write out the actual amount (and percentage!) of these goals and expenses.
To illustrate and for simplicity, let's say you get paid twice a month and make $1,000 per paycheck (after taxes, so that's what you actually take home after you're paid), then your buckets may look something like the example in the picture.
You'll have to do a bit of estimating but and some calculating but don't get caught up in being exact. You want to make a best guess approximation and then you can adjust as you go. This is especially true for variable expenses like groceries and gas -- give it your best guess.
IMPORTANT: Keep in mind that this is a per paycheck allocation and not a monthly allocation.
3. Automate (15 minutes)
Now the funnest part! Setting up the buckets.
Take 15 minutes to write out your bank accounts -- each bank account is one bucket. If you currently have one bank account, then you may want to consider getting other accounts so that each account has a job, like this:
- Bucket A: Retirement - A retirement account, like an employer-sponsored plan (i.e. a 401k, 403b, etc. that your employer provides), or an IRA that you set up yourself.
- Bucket B: Emergency Fund (a.k.a. F*@k Off Fund) - A savings account that's for savings *only,* preferably a high-yield savings account so that you gain a bit of interest. But if you have a savings account, just start with that. #babysteps
- Bucket C: "Adulting" Money - A checking account that holds money for the things you must pay (large fixed expenses) like rent, car payments, car insurance, student loans, health insurance premiums, etc.
- Bucket D: Fun Money - Oh yeay! This is a *separate* checking account that you can spend on whatever the f** you want. Stress-free spending. Cha ching!
The key is to have these accounts live in separate banks. So that you can't dip into them easily to make transfers on a whim. Having a transfer take 2-3 business days between banking institutions helps with this impulse spending just like buying fresh fruit instead of a chocolate cake helps with calorie counting.
You'll then make this automated by setting up an automated transfer or direct deposit from your paycheck to each of your buckets. So, in the example above, the direct deposit would look like this per paycheck:
- Bucket A: Retirement -$80
- Bucket B: Emergency Fund - $50
- Bucket C: "Adulting" Money - $570
- Bucket D: Fun Money - $300
And again, this is per paycheck so in the example above one month's rent is $500 not $250.
You'll have to make this calculation and adjustments based on how your particular situation (like how often you get paid per month, if you contribute to retirement before or after taxes, etc.), but the bottom line is to, take a few minutes to do this now, and then you won't have to think about it again until there's a significant change in your personal finances (you negotiate a raise, you pay off your loans, your rent changes, etc.).
TWO VERSIONS OF BUCKET (FOR THE EMPLOYED AND FOR THE SELF-EMPLOYED)
Here's are simply illustrations of buckets.
If you're employed and get a paycheck paycheck, your buckets would look something like this:
If you're self-employed (and this is true of solopreneurs/freelancers too), you have to account for your business.
The simplest thing to do is treat yourself like an employee and pay yourself twice per month via an external transfer to your various accounts.
So, all of you business's income goes into a business checking account, then your estimated taxes go into your savings account (so for each check/sale a percent of that will go into your savings account), and then expenses (including your own "paycheck" will come from the checking account).
I have a photography & film business, so my expenses include gear, lenses, etc., which you can see listed below.
Depending on the type of business you have, your income, and other variables, you'll want to connect with your accountant about your estimated taxes and any other variables (like hiring others, etc.). Also, I think everyone in business should have an accountant, mine is under $250 per year and she makes up for it 10 fold with all of my questions...thanks Kim :)
Voila! Sign, Sealed, delivered!
The bottom line: Automation is greater than motivation!