Buckets and Budgets

Do you have financial priorities? Perhaps it’s a family vacation or saving to buy your dream house. Maybe it’s just to pay off student loans or credit cards and get out from under that mountain of debt.

If you want to achieve financial independence, it is essential that you understand your financial priorities and gain control of your money. Most people let their money control them. That’s backwards. Gaining control of your money means getting to the point where you determine in advance how your money will be spent. You set your priorities and then spend your money in accordance with those priorities.

I suggest two different approaches for gaining control of your money. The first method is for people who either don’t want to manage a budget or simply don’t want to pay for budgeting software. The second method is to create and stick to a zero-based budget each month.

  1. Use multiple bank accounts to manage your spending
  2. Use a zero-based budget

Using multiple bank accounts to manage your spending.

Budgets aren’t for everyone. If you’re not the kind of person that can successfully manage a monthly budget, then you may prefer managing your spending with multiple bank accounts. This is a simple method that can be effective for many people.

Here’s how it works…

Buckets of money

Imagine dividing your income into three separate “buckets”.

  1. Saving (and Giving)
  2. Needs
  3. Wants


Bucket #1 – Saving (and Giving)

If you wish to achieve financial independence, this is the most important bucket for your money! Paying yourself first is the secret that is known by all people who have achieved financial independence.

NOTE: I include charitable giving in Bucket #1 because of the priority I place on this in my own life. This is a personal choice, but if giving is important to you, then I recommend that you include that money in this bucket.


Bucket #2 – Needs

This is the largest bucket for your money. It contains all of the money needed for your required living expenses – housing, transportation, groceries, healthcare, insurance, etc.


Bucket #3 – Wants

This is the bucket for everything else. Think of it as your discretionary spending. Money in this bucket allows you to pay for things you want, but don’t need. This bucket may be used for entertainment, recreation, shopping, vacations, etc.

Creating the buckets.

Now that I’ve described the 3-bucket concept, I’ll explain the mechanics of implementing this method. Each bucket requires a separate bank account. This is how you will keep the funds separate from each other and begin to control your money.


Account for the Saving (and Giving) Bucket

This account should be accessed infrequently since its primary purpose is long term savings and not day-to-day spending. It will contain your Emergency Fund (3-6 months of living expenses) and your savings for retirement. Because this account will grow over time and hold most of your “idol” money, I suggest that you use an account that earns a high interest rate. You may not need a debit card for this account unless you also use it for charitable giving.

Recommendation: Online, high-yield savings account


Account for the Needs Bucket

Since this is your primary account for paying monthly bills and living expenses, it should be a checking account with debit card access. Most of the money in this account will be spent each month so it’s not too important whether this is an interest-bearing account.

Recommendation: Checking account with local bank or credit union


Account for the Wants Bucket

Like the account for your Needs bucket, this account will be actively used and it should have debit card access. Most of the money in this account will be spent each month so it’s not too important whether this is an interest-bearing account. This account can be at a different bank or simply be a second checking account at the same bank as the account for the Needs bucket.

Recommendation: Checking account with local bank or credit union

Filling the buckets.

Now that I’ve explained the account setup strategy, let me explain how to use these accounts. Setup your paycheck for direct deposit into the Needs checking account. Next, determine the amount that you will save each month and setup a recurring transfer to the Saving (and Giving) account for that amount. By automating this monthly transfer, you significantly increase your odds for success! Be generous; your future self will thank you. Lastly, determine the amount that you will allow yourself to spend in the Wants bucket and setup a recurring transfer to that account as well.

Here’s a picture of how this works using a 50/25/25 percentage allocation among the three buckets…

Use a zero-based budget.

If you’re open to the idea of budgeting, using a zero-based budget is an excellent way to gain control of your money and build a spending plan that is aligned with your priorities.