Budgeting can be a real beotch. Most of us dread the process, and very few of us use a system that consistently works. Software programs such as Quicken and Mint can help us look backwards at what we did spend but are not so great at making sure we’ll have enough money to meet future needs.
My friend, an experienced financial planner, says he no longer recommends that his clients create traditional budgets. Instead, he advises they save in separate buckets (i.e., designated bank savings accounts) for upcoming needs. For example, one savings account might be for “vacations.” Each month, you fund that savings account with a set amount required to fund a vacation.
Here is what an annual bucket budget might look like:
| Annual income = | $60,000 |
| Pre-tax retirement saving = | ($6,000) |
| Taxes withheld = | ($12,000) |
| Rent or mortgage = | ($15,000) |
| Recurring expenses (bills, groceries) = | ($10,000) |
| Amount available for savings = | $17,000 |
Savings buckets
| Vacations & travel | $5,000 ($416/month) |
| Future home or home improvements | $4,000 ($333/month) |
| Auto repair or new auto | $3,000 ($250/month) |
| Unplanned expenses | $2,000 ($166/month) |
| Savings and investments | $3,000 ($250/month) |
You might be wondering if you have to open FIVE separate savings accounts at your bank. YES, you do. But not to worry; at most banks, you can open these savings accounts online.
Practically speaking, managing these accounts is easy. Assuming you get paid monthly, after you get your paycheck deposited, the first thing you do is hop online and transfer the planned amount of money into each savings account. Viola! You’re done.
Another nifty tip is that if a particular account builds up more cash than expected, you can always transfer some of those funds to another savings account. Or, you can let the amount continue to build in case your needs increase down the road.
I hope this helps simplify your budgeting process. Or, if you insist on budgeting another way, here is our previous blog, How to Save Time Creating and Maintaining a Personal Budget. But to be honest, I like my friend’s method best!