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Bucketing money: help savings & cash flow

21 May 2024
• 4 minute read
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Some people are naturally good at managing money. And we’re happy for them, we really are. But given that the basics of personal finance aren’t taught at school (why, we’ll never know), the rest of us need a little help from time to time.

One strategy that’s become popular in recent years is ‘bucketing’ your income into separate bank accounts. It’s easy to understand, simple to implement, and when done properly, an effective way to organise your cash flow and savings.

In fact, our recently-released No Place Like Home report revealed that it’s the single most popular savings strategy among prospective first-time homebuyers, with 34% of those looking to get on the property ladder using it.

So if you were at the back of the queue when they were handing out the ‘good with money’ gene, this one’s for you!

The four-bucket method

Originally devised in the 1980s as a way for wealthy retirees to maximise their lifestyle, the principle of bucketing has since evolved to help people of all incomes manage their finances.

The essential idea is that you have a number of separate bank accounts, each with its own particular purpose. Typically, this would involve one dedicated to your essential expenses, one for non-essential spending, one for savings and, ideally, a fourth for an emergency fund.

You then allocate a certain amount of your income to each ‘bucket’ every time you get paid, the idea being that you’ll have a clearer idea of where your money’s going and, in theory at least, avoid having to rely on credit cards or buy-now-pay-later services to get through to next payday.

A great way to grow your savings

Another major plus point of bucketing is that it ensures you’re steadily growing your savings. The importance of this can’t be overstated. One of billionaire investor Warren Buffett’s most famous sayings is, “Do not save what is left after spending, but spend what is left after saving.”

And if you think about it for just a moment, the wisdom of this simple idea is obvious. If you wait until the end of the month (or week or fortnight) to see how much of your salary is left, chances are the answer will be somewhere between ‘not very much’ and ‘big fat zero’.

The bucketing method flips this mentality on its head. There’s no guarantee you’ll end up one of the world’s richest people like Warren Buffett, but you’ll definitely be better off than you otherwise would be.

How much should you allocate to each bucket?

The first step to successful bucketing is working out how much you need to allow for essential expenses. Once you’ve established this to a reasonable degree of accuracy, then you can start thinking about how much to allocate elsewhere.

Essential expenses

As the name suggests, essential expenses are things you can’t do without. So that’s stuff like rent or mortgage repayments, transport costs, utility bills, and groceries. Minimum loan and/or credit card repayments belong in this category too.

Some of these outgoings will be regular, fixed amounts but others, such as power bills, will vary. For variable expenses of this kind, you can work out how much to set aside by taking an average of your last year’s worth of bills. Or you could use the highest bill of the last 12 months as your benchmark.

However you decide to work it out, you should be able to find the information you need from your bank statements. Add all these essential expenses together to get your total. Rounding up to the nearest $100 will give you a little extra buffer as well as a nice round number to work with.

Then it’s simply a case of subtracting this figure from your total income to find out how much is left for your other buckets. Let’s call this amount your ‘surplus’.

While there’s nothing stopping you doing this the old-fashioned way with pen and paper, an online budget calculator is easier and more convenient.

Non-essential spending vs savings

Now you know your surplus figure, you’re faced with a problem (albeit a first-world one). Which bucket do you allocate funds to next? Our friend Mr Buffett would no doubt suggest it should be savings.

However, you might prefer to estimate your non-essential spending (e.g., takeaways, hobbies) first and see what’s left for your savings and emergency fund after that. Or you could go with a hybrid approach and review your non-essential spending, see if there’s anything you can cut (do you really need all those streaming services?), and free up more for your savings bucket.

Whichever you decide, an online budget calculator is the easiest way to go about it.

Although it might not seem like it, prioritising non-essential spending over savings isn’t really going against Buffett’s advice. As long as you commit to allocating a fixed amount to your savings bucket every time you get paid, you’ll still be abiding by the spirit of his idea.

Emergency fund

While not strictly necessary, it’s recommended to create an emergency fund bucket. Why? Because life has a habit of biting you on the backside. If you’ve got a decent-sized lump sum tucked away, you can deal with unexpected life events like losing your job, medical emergencies, and car repairs without having to raid your savings or, worse, getting into debt.

Which accounts for which buckets?

Not so long ago, opening a new bank account was a laborious and time-consuming business. In the digital age, however, you can do it online in about five minutes. Yay for technology! But before we get carried away, let’s make sure we’re clear on which accounts are best for which buckets, and how to optimise the relationship between them.

Your essential expenses bucket should be a transaction account. This is because you’re going to need a debit card and the ability to tap and pay to make purchases. Great Southern Bank’s Everyday Edge Account offers both without charging monthly or annual fees.

But better still, it also offers the chance to earn generous bonus interest when paired with a Home Saver or Goal Saver Account. This is conditional on a minimum deposit ($2,000 for Home Saver, $500 for Goal Saver) into your Everyday Edge Account and at least five Visa Debit card purchases each month.

But given that your Everyday Edge Account is for essential expenses, meeting these criteria shouldn’t be an issue. This being the case, opening an Everyday Edge Account for essential expenses and linking it to a Home Saver or Goal Saver Account for savings is the way to go.

So what about your non-essential spending and emergency fund buckets? Our recommendation would be a savings account with no bonus conditions. An account like… the Great Southern Bank eSaver Flexi! Although it can’t match the bonus interest of the accounts mentioned previously, it nonetheless offers a highly competitive rate with no strings attached.

Optimising the process

Organising your buckets like this should ensure your money isn’t just easier to manage, it’ll also be earning the best possible interest. But you can take things a step further and schedule transfers to your various savings ‘buckets’ for when you get paid. This will ensure you never forget to prioritise saving over spending. Old mate Warren would be proud!

We’re here to help

If you have any questions or would like help setting up your own bucketing system, feel free to give us a call on 133 282. Alternatively, you can always pop into your nearest branch for a chat.

Important Information

Great Southern Bank, a business name of Credit Union Australia Ltd ABN 44 087 650 959, AFSL and Australian Credit Licence Number 238317. Conditions, fees and charges apply. This is general information and does not take into account your objectives, financial situation or needs. Consider the appropriateness of the information, including the Terms and Conditions (T&Cs) booklet, before acting on it. The Financial Claims Scheme may apply to this product; refer to the T&Cs for more information.

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