August 8, 2013, 5:00 am

The Bucket System – a Route to Financial Freedom?

by: The Financial Blogger    Category: Pay off your Debts
email this postEmail This Post Print This PostPrint This Post Post a CommentPost a Comment

 

 

Budgeting… wow, this is something I haven’t done for soooo long!

 

As you can see, I’m becoming a lot more conscious about my debt repayment plans this summer. Once my wife starts her daycare in September, I want to put a super solid plan in place where we will kill our consumer debts within two years. In order to ensure my goal is achieved and I actually put this plan to work, I’ll setup a “bucket system” where I will pay myself first into several accounts.

 

What’s a Bucket System?

 

A bucket system is definitely not a new approach to personal finance. Many of my good friends use it and it definitely works. However, it requires discipline and a strict budget (or a lot of money coming in, hahaha!).

 

The goal is to receive all your income into a single account which is already the case for my wife and I. Then, the money is distributed into several other accounts called “Buckets”. Each bucket has its own purpose. Depending on your goals, you may have 1, 2 or 10 buckets. It’s a very effective way to make sure the money you earn is used for what you really want.

 

It also minimizes surprises in your budget. For example, I pay my municipal taxes as required by my city. This means that I make about 9 payments throughout the year to pay them in full. So I have some months where my municipal taxes are “free” since I don’t have to make a payment and others when I have to find about $400 to pay my bill. This $400 is sometimes a “surprise” in my budget when it happens. With the bucket system, I could easily split my yearly tax amount to be paid into 26 bi-weekly payments where I could take money from my bank account and save it in a bucket. Each month I need money to pay my taxes, I simply have to withdraw it from the bucket and it doesn’t affect my regular bank account.

 

My Own Bucket System

 

Without knowing so, I’ve already started my bucket system with my RESP and TFSA systematic investments. I will now just create more buckets to make sure my budget is under full control and that I concentrate the bulk of my extra cash in paying down my debts.

 

bucket system

I already have my RESP and TFSA setup this way as I mentioned before. This money is automatically invested in mutual funds as it is free of transaction fees therefore it helps me manage a small amount of money. Eventually, I’ll probably buy stocks with my RESP as it is growing rapidly.

 

The line of credit payment will be used to drop it and generate liquidity. Each time I have enough room on my line of credit to pay off another debt as my pool loan is at 6.45%, I will draw a check from my line of credit to pay it off completely. I will then apply the debt snowball method to increase my line of credit payment and clear the next debt. The goal with this strategy will be to decrease my monthly payments used to pay consumer debts.

 

Then, I will create three more buckets where money will be systematically invested in money market funds. I will grow an emergency fund for both house and car maintenance. The “fun account” will be used for several purposes such as paying for gifts, clothing, vacations and sporting activities.

 

Buckets are Restrictive but Efficient

 

The reason why I’ve been avoiding buckets my whole life is due to their highly restrictive aspect. Since the money is leaving your bank account as soon as it is being deposited, you have no room for extra spending. This is why it’s important to have a well balanced (and positive!) budget before you start with a bucket approach. There is no point of saving your money into buckets if you are about to take that money out to finance your lifestyle all the time!

 

On the other hand, buckets are highly effective since they serve a single purpose: putting money aside! The good news is that if my car doesn’t require maintenance this year, I will have a lot of money saved for bigger repairs in the future; same thing with my “fun bucket”.

 

The bucket system will start for my family in October 2013. Since we have committed to several expenses for the daycare between June and August, I will need the $2,000 generated from the daycare to balance my extra spending from the summer. Then, in October, I should be ready to start a new life!

 

Readers, have you tried the bucket system to manage your personal finances? How did it go?

 

Similar Posts:

You Want More? Sign-up! ->
TFB VIP Newsletter


If you liked this articles, you might want to sign for my FULL RSS FEEDS. If you prefer to receive the posts in your email, subscribe CLICK HERE


Comments

Interesting. I haven’t heard of the bucket system before. From the looks of it you’ll be automating or semi-automating some of your finances and I would imagine it requires quite some discipline not to “touch” money in a specific bucket for other uses.
The only system I have tried so far is the envelope system and that requires even more discipline since you are literally and manually allocating the cash so perharps transitioning to the bucket system wouldn’t be much of a stretch and would even save me some budgetary temptations :)

Hey Simon,

This is pretty much the same system as the enveloppe but you don’t have to do anything once it is setup. Money transfers are being done automatically.

The key is definitely not to budget too tightly so you have to touch the money in another account to compensate for your spendings!

Simon have you ever considered using a budgeting software like YNAB (You Need a Budget)? I’ve been using it for approximately 2 months now and it has been great, you can achieve what you are attempting to do by using that software and with just ONE account. At first it didn’t quite make much sense to me, but once I started using it, I’ve transferred everything into one account and I manage my budget from there.

They do have many tutorials and video tutorials and live classes that are all free, the software is not free but it is worth it.

I would highly recommend you to try out YNAB before you go opening more accounts which can sometimes cost money and make things a little harder to manage, there is a free trial you can use from their website and please do the tutorials, I didn’t at first and I wish I had.

I hope it works out either way! keep it up! :)

I meant to address that message above to Mike as well :)

Great share… we do our best to manage to a budget, but sometimes just “thinking” frugally is all we can accomplish. My wife is less interested in budgeting but she is also very frugal.

by: The Financial Blogger | August 9th, 2013 (10:58 am)

Hey Vikas,

I didn’t use YNAB but I’ve onced use Microsoft Money for about 12 months for all my personal finance (budget, investment, etc). It was an amazing tool but I’ve lost the patience of tracking and using it on a daily or weekly basis.

This is why I’m trying the bucket system as it is an automated way to set your budget without spending much time on it. I only can spend what’s left in my bank account and the rest is being handled for me :-)

@Hey Tortoise,

I can’t be frugal, it’s against my beliefs… lol! seriously, I’m not very good at being frugal so this is why I have to “force” myself into an automated system :-)

[...] The New Yorker | How the Government Killed a Secure E-mail Company Retire By 40 | A Different Perspective On Retirement Hull Financial Planning | Monkey Brain Needs Some Convincing The College Investor | 8 Examples of “Mental Accounting” and How to Avoid Them Bloomberg | According to Golf the Economy is Out of the Rough Thousandaire | Steer Clear of Debt by Avoiding These Bad Habits More Money Than Month | How to make sure your charitable giving really gets to the needy Untemplatr | Redefine Your Limits and Achieve More Than You Ever Imagined Wise Bread | 6 Things Every College Student Must Know About Private Student Loans Invest It Wisely | Basic Rules to Make Savings with Little Effort Frugal Portland | AirBnB: The Good, The Bad, and Lessons for Next Time The Financial Blogger | The Bucket System: A Route to Financial Freedom? [...]

Just an aside comment – To some extent this approach draws parallels to Project Management techniques for allocating, monitoring & controlling project budgets in what is called a Work Breakdown System or WBS.

I do something similar to this by using the budgeting system on mint. It works kind of backwards from your system though. It tells you how much you have left to spend in each bucket.

[...] shows you how to build a bucket system from A to Z with online [...]