Four Buckets of Money

We have all heard many stories of Americans who have found themselves in tight financial situations. Some have dug themselves out while others are still struggling. It seems many of them just did not know how to organize their money to begin with. I thought I would share my method, which has worked quite well for my wife and I. Simply put, we organize our money into four "buckets": regular expenses, emergency savings, goal-oriented savings, and investment/retirement.

The regular expenses bucket is the most obvious one because we all have it. This covers your housing, utilities, bills, food - in short, all the expenses we pay for regularly. It is an essential bucket, but unfortunately it is the only one many people have.

Emergency savings is the next most obvious, and it is the one people are most likely to have if they make it beyond the regular expenses. This is where you set aside money to cover those unexpected expenses that occasionally pop up. Whether it is a leaky roof, repairs to your car, or a veterinarian bill, it is better to borrow from yourself than a credit card. Plus the money earns interest in your own account when you are not using it!

Moving on to the less obvious buckets, next is the goal-oriented savings. Want to take a vacation? How about for a home renovation? Again, it is better to borrow from yourself than from a bank or credit card. Here you can manipulate the variables to find a solution that works best for you. Do you want to take that vacation in six months? Can you afford to put that much aside between now and then? If not, maybe it would be better to push the vacation back. Even if you cannot save up the full amount you will need, the less you put yourself into debt the better. My wife and I set aside money toward our next new car. Although we will probably need that care long before we are able to pay cash for it, we will be able to make a sizeable down payment. Also, since we set aside a nominal car payment each month, when the actual payments start we will not be missing the money that we were not spending anyhow.

The last bucket is for investment/retirement. These are inextricably linked. You cannot "save" your way to retirement, not in the sense of putting money into a savings account. Consider this: if you work for 50 years and put aside ten percent of your pay each year, what will you have at retirement? You will have ten percent of 50 years' pay, or about five years' pay. Even with interest from the bank, taking inflation into account you will not be able to retire comfortably unless you do not plan to be retired very long. This bucket is where I recommend getting professional help. Unless you have been educated in investing for your future, the money you spend on having a professional take care of your investing will be money well spent.

The last piece of the puzzle that makes this system work is one that you have probably already heard: you must have a budget! This will help you decide how much you can put into each bucket. You may be surprised by how much you can put aside in the three non-expense buckets once you see exactly how you are spending your money.

This system is simple but it works. However you choose to organize your finances, keeping them in order is a much better alternative to fixing problems later.