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How to Use a Buckets of Money Budget
Overview of Buckets of Money Budgeting
Buckets of money budgeting is akin to the money envelopes method. A budget is determined before the start of the month, including how much money is set aside for several very large categories prone to overspending.
Envelopes and “buckets of money” in a household could be household, groceries or entertainment. The family can spend the money in that envelope on anything they want within that category. Whether they buy soda or bottled water, hamburger or sirloin steak is irrelevant. What matters is the hard stop that is reached when the money runs out.
Fortunately, the physical reality of the budget is clear every time someone pays attention to the available remaining funds when they withdraw money from the bucket. When money is visibly running low, spending will tend to drop naturally to conserve the remaining money.
Buckets of money categories are even simpler to manage, using larger categories to simplify money management even more. Instead of “eating out” and “groceries” envelopes, there is a single “food” bucket or category. Instead of “children’s sports” and “adult entertainment”, there is a “family entertainment” category. The family can eat out as much as they want but be aware of the risk of having to scrounge through the pantry at the end of the month if they don’t manage their expenses well. If parents pay for kids’ sports, the family as a whole may have to stay home from the movies for the rest of the month because that consumed the entire “family entertainment” money buckets.
Buckets of money are not limited to spending. Savings and charity can be their own “buckets”. The savings bucket must be divided between college plans for the kids, IRA contributions for the parents and building up the emergency fund. Charity buckets can be divided between casual contributions to various beggars, family asking for you to buy items for fundraisers and donating to charities or religious organizations. When the money in that bucket runs out, there are no more donations or savings plan contributions that month.
Buckets of money budgeting is valuable because of its simplicity to set up and to follow. The challenge in buckets of money budgeting is the same as all budgets – discipline.
Disadvantages of the Buckets of Money Budget
The buckets of money budget is attractive because it has few categories. However, one of its disadvantages is detailed tracking and granular reporting of where the money goes. For example, someone may have a food category and food money envelope used for both grocery store trips and eating out. You cannot then look back at how much money was spent at McDonalds relative to the grocery store.
Buckets of money budgeting doesn't exclude large bills that come up irregularly. For example, you may need to pay your home owner's insurance, life insurance or auto insurance once a year. The buckets of money budget doesn't preclude setting aside money for insurance or even each type of insurance. However, given its simplicity, the buckets of money budget works best when all bills are paid monthly.
Buckets of money budgeting, like any budget, won't work unless you stay within the financial boundaries. For some people, this is easier when food money can be spent on either groceries or eating out, when household money is spent on either home repairs or household items. However, the buckets of money budget won't work unless you don't spend too much overall.
The buckets of money budget works when you don't have too many categories to keep up with and budget reasonable amounts for each category. The buckets of money budget can be used with the envelope system, as well as the four walls budgeting plan. However, it won't work as a budgeting system if you can't control where you spend your money or give into temptation by raiding other categories.