Whether you are trying to save money or lose weight, there is no one-size-fits-all solution. However, as with dieting, sometimes the financial strategies that work the best are a little bit offbeat, even fun. Consider, for example, the success of Bank of America’s “Keep the Change” program where your debit card purchases are rounded up to the closest dollar and the difference is transferred from your checking to savings account. Another savings strategy found to be effective is the “bucket concept.” Rather than adhere to the traditional budgeting chore of writing down your expenses and tracking them each month, the bucket concept requires you to divide your spending into six categories and assign a specific percentage to each bucket.
The bucket approach was first encountered in Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth by T. Harv Eker. In his book, that spent time on the New York Times’ bestseller list, Eker suggests dividing your income this way:
- 50% for necessities such as your mortgage payment or rent, car payments, groceries, utilities, gas, internet, cell phone, etc.
- 10% for long-term savings to fund vacations, car repairs, house maintenance, clothes, etc.
- 10% for retirement accounts such as your 401(k) plan or IRAs.
- 10% for fun.
- 10% for education, from repaying student loans or funding your continuing personal development to saving for your children’s college education.
- 10% for charity.
When making your allocations to each bucket, consider 100% of your total after-tax income. This means, that in addition to income you earn, you also divide inheritances, bonuses, even your tax refund into six categories. Eker’s key is that this money should never be commingled. That is, you cannot borrow from long-term savings to fund a dinner out or forgo your regular deposit into the education bucket when your charity bucket is empty and you want to contribute $100 to your friend’s bike-a-thon.
The easiest way to fund each bucket would be to open separate checking accounts and have the appropriate percentage of your paycheck deposited into each account. This may not be feasible with your employer and could involve significant banking fees. Of course, you can open a 529 college savings plan and an IRA and have your education and retirement accounts funded directly from your checking account. Also, if you have a 401(k) at work, that account is funded automatically before you receive your check.
Interestingly, however, many people report success with substituting jars for checking accounts, particularly for the fun account where it is easy to spend cash. Perhaps that’s because by actually placing money in a jar it encourages them to think about finance more often than at bill-paying time or during an annual review with a financial advisor. Using a jar also can be especially effective if you are trying to save for a family vacation. For example, as your family sees the savings accumulate, they may be more inclined to make sacrifices to stay within your food budget. Of course, if you’d rather keep your long-term savings in a money market account to earn interest, putting a piece of paper noting the amount you invested in that account could also serve to motivate your family.
In discussing the bucket concept with clients, there are some common reactions. Most notably, many say that they spend far more than 50% of their income on necessities. In fact, given the high cost of living in particular parts of the country, surviving on half of what you make may be an impossible goal. Naturally, you can adjust Eker’s percentages to reflect your own circumstances. For example, if you need 65% for necessities, you might drop education, charity, and long-term savings to 5%. However, you are encouraged to at least reflect on the possibility of living on 50% of your income. Often, simply considering the idea can help you to start to prioritize your expenses and to think more proactively about what you are spending your money on each month. In fact, quite a few clients have come to the realization that they were living in a house that was too expensive for them.
Debt is another issue that can throw a wrench into Eker’s ideal percentages. If you have significant consumer debt, you may need to direct more than 50% to your necessities bucket in order to help you dig out of that hole as soon as possible. However, once you are out of debt, funding your long-term savings account can help you stay debt-free. That is, as your long-term savings account builds up over time, you’ll have a cushion so that you won’t have to pull out your plastic to manage an unexpected car or home repair bill. In that sense, your long-term savings can also function as the traditional “emergency account.”
Finally, Eker insists that your fun money be spent on a regular basis. Arguing that most budget plans fail because they create a spending plan that is too tight for comfort, Eker stipulates that fun money cannot accumulate for more than 90 days. Think of spending money on yourself as both a reward for saving in other buckets and as a means of re-energizing yourself to save more.
If you are considering implementing the bucket theory, it is suggested you keep in mind another piece of advice from T. Harv Eker. He believes that what we focus on expands and grows. Accordingly, he suggests that for at least seven days after implementing any financial self-improvement plan that you do absolutely no complaining – not out loud, not in a whisper, not even in a passing thought. The positive energy you create – in combination with the structurally sound bucket approach to budgeting – may be just what you need to move further down the road to financial freedom.