How the Bucket System Guarantees Financial Success
I was listening to a podcast featuring Leo from The Financial Samurai where his message was that if you’re not uncomfortable, you’re not growing financially. You should have to choose between buying your lunch on a weekday versus after work drinks with friends, and be motivated to pack a lunch. You should force yourself to bike a few days a week to save $3 in bus fare each way. You should wait to read a book or see a new movie until you can get your hands on a library copy, rather than buy it new. These are some example of choices I have made this week.
The truth is I could afford anything but I can’t afford everything. So of my budget, I have to direct my dollars towards those purchases which will maximize my happiness. I have to get uncomfortable. And one tool to increase my discomfort, and thereby maximize my financial success, is the bucket system of savings.
The bucket system is what I call my automatic withdrawals savings process. I get paid twice a month and that evening, various accounts/buckets will siphon off almost half my income to whatever goals I am working on at the moment.
Obviously, you can’t just set that up without knowing where the money to fund each account is going to come from. Here is what I suggest: to develop your own bucket system
- Using a financial app or old-school math, figure out what you are spending in each category
Take your monthly income, add it up and figure out what percentage you spend on living expenses, food, monthly ‘subscription’ expenses (ex gym, car, delivery services). When my car lease expired 5 years ago, I realized I really didn’t want to keep paying $500 a month for access to a car, gas, and insurance. Recently I have cut my cell phone bill, gym membership, life insurance, and spending on clothing. Cut, cut, cut.
2. Figure out where you are going to cut costs, and where you have some extra money in your paycheque
With my cuts to my monthly expenses and budgeting, I realized I have $1,700 dollars a month available for my bucket savings.
3. Set up automatic withdrawals to match up with your pay schedule
This step assumes you already know what your goals are. If you don’t, take some time to consider where you want to go in life. I’ll write another post on this topic later.
Each month, my extra money gets funneled off to fund my various goals as follows:
$500… savings for our wedding
$500… prepayment on condo mortgage
$300… RRSP (this is a Canadian registered retirement account)
$200… solar bonds purchase fund (every time the fund accumulates $1,000, I can purchase one bond)
$200… TFSA (this is a Canadian unregistered savings account)
As you can see, right now, saving for our wedding and prepaying my condo investment property are my top two financial goals.
4. Track your net worth at the end of every month
Yep, if I had an extra $1,700 a month to blow, I would have no shortage of things to spend it on. I have to consciously curb my spending because I know the bucket system is going to withdraw so much of my earnings from my checking account. It’s a challenge and it feels extremely gratifying to track my net worth on the last day of every month and see it go up. Consider it delayed gratification, folks.
The bucket system works because it is a conscious and tailored plan to help you achieve your goals. It follows common financial tips like “Pay yourself first” and “Make it automatic.” I suggest you start with a minimum of one withdrawal per paycheque, and add more withdrawals as you become with the system and as you “find” more money to fund your personal goals.
What does your bucket system look like?