Kelly Robertson
You know that saving money is good for you, right? We don’t want to go into details explaining that. What we want to do is suggest a different way to save money.
Instead of putting all the extra cash into a single account, consider dividing it into four buckets, each of which has a different purpose. By taking that route you will be better prepared for life’s twists and turns…
1. Annual or Quarterly Expenses Bucket
The first bucket is for quarterly and annual expenses such as holidays, birthdays and back-to-school shopping. Also, your heating bill during the winter days fits into this bucket.
In other words, this bucket is made for regular costs that are not paid on a monthly or bi-monthly basis, as well as for monthly costs that tend to fluctuate based on the season.
What you want to accomplish is save a little extra every month and put it in this bucket so when the time comes, you can easily cover those extra costs.
For instance, say your summer vacation costs $1,200 — you’ll want to put $100 on the side every month to cover the trips from that money. Or, if your heating cost rises significantly during the winter, you’ll want to have that extra money to pay for it without sweating about it. Alternatively, you could talk to your utility company for a more uniform billing option which would take into account your expenditure throughout the year and spread the cost across all 12 months.
To sum it up — this bucket is used to cover any recurring quarterly, annual and even biannual expenses.
2. Irregular Expenses Bucket
Unlike the first bucket, this one deals with costs that are not that easily predictable, and are thus slightly harder to manage. For instance, your car will need some repair at one point, you may need to fix something inside the house, or your pet will be sick and you’ll have to pay a veterinary bill — these things happen, you/we just don’t know when they will happen.
This is where the second bucket comes to play. That being said, this bucket shouldn’t be confused with an Emergency Fund, which is the third bucket on our list. Money placed in the Irregular Expenses bucket is used for inevitable costs, as you know your car will need a repair and that some maintenance around your house is required. You just have to budget for it.
So set aside a certain amount of money into this fund, say a $1,000, to fund these “irregular bills” when they need to be addressed.
3. Emergency Fund Bucket
The third bucket is your emergency fund, which all of us hope to never use. However, life throws curve balls at all of us, and when an emergency strikes — we better have some savings to deal with it. The alternative is to swipe a credit card and get into debt.
Your initial goal should be to put at least $1,000 into an emergency fund and build from there. Eventually, you should have enough money to cover at least three months’ worth of living expenses, according to advice from the Financial Industry Regulatory Authority (FINRA).
Money from this fund should be used ONLY for situations such as a job loss or a health emergency. In that sense, an emergency fund serves as buffer against unexpected financial shocks.
FINRA’s research has found that in 2015, 54 percent of U.S. households didn’t have enough savings to cover three months of expenses. You are or will be smarter than that, right?
Also read: 7 Frequently Asked Questions About Emergency Funds
4. Financial Goals Bucket
Finally, we have the fourth bucket where you will be putting money for your financial goals. Whether you want to retire in 60, attend graduate school or start a business of your own, you will need money for that.
It is crucial that this bucket comes last. Only when you have enough money in all other buckets should you start putting cash in this one. You could add money in all four buckets simultaneously, if that’s feasible.
Conclusion
Keeping money in multiple buckets could help you advance your savings, while enabling better monitoring of whether or not you’re on track.
When you’ve built your savings in this way — presuming you have stashed enough money in each of the buckets — you will be better prepared for life’s curve balls. Also, you’ll enjoy a piece of mind knowing that (almost) whatever comes up, you will be able to handle it. Good luck! 😉
