Cost of living tactic No.63: Bucketing your money

Woman writing in notebook

With all the talk about the cost of living rising, I've been looking into the simple act of saving money. It's not something that comes as naturally in 2022, when the emphasis on spending feels well ingrained.

But saving has always been touted as a way to prepare for life's many expenses, those known but also the more surprising ones. In a way, saving helps give us a sense of control over our lives and research in this area has shown that it can also make challenges easier to cope with, providing us with a bit more resilience in times of stress.

As finance author Morgan Housel writes, "saving for things that are impossible to predict or define is one of the best reasons to save."

I like this idea but what's the best strategy to take?

So, one approach to saving I've been reading up on is called "bucketing", which is basically a gathering of your money into piles, so to speak, without needing to turn to any complicated Excel sheets or calculations.

Many financial experts and banks explain that bucketing is about having multiple banking or savings accounts for specific purposes. For example, one account might be for bills, another for regular entertainment costs, and a third purely to save money for a rainy day. The separate accounts, or buckets, are meant to give you a clearer view of your money.

For those who have several bills or debts to pay off especially, bucketing can clear the clutter and ensure funds are kept aside to handle those bills. In a similar way, splitting up your money allows you to see how much is left over each week or month so that you can plan for a larger purchase down the track.

There are a few steps typically given on how to best tackle the bucket set-up, so I've summarised those below.

How to set up your savings buckets

The first step is to work out what you typically do with your money. You can write up a basic budget on a notepad, or even use an online calculator. This step is about visibility, knowing how much comes in each pay cheque, how much goes out and what's left over.

The next step is to group your spending into simple categories such as expenses, everyday spending money and left over savings. Or maybe it's bills, regular expenses such as groceries and fuel, and then money for fun things. Or, yet again, Costs, Spending, Saving. In short, these are your buckets and they can be grouped into separate accounts.

I think a simple expenses bucket is sensible, accounting for all the routine bills, groceries, transport or petrol, insurance, school or sports club fees, the regular mortgage repayment or rent and so on. All of it should be tied to a debit account and card to make it easier, so you'd probably go with a bank account that has no fees, allows you to make a suitable amount of transactions each month and gives you the access to it that you need.

The next bucket is your spending money which of course is for the fun stuff like trying that new Spanish restaurant nearby, attending an Ed Sheeran concert or maybe doing some online shopping for new Reebok sneakers. This account should also be a flexible bank account linked to a debit card so that you know exactly how much is going out, as opposed to a credit card where you can lose track of debts more easily. A buy now pay later service might work here too, as long as you are using a debit account and paying the instalments off on time.

The third bucket is a rainy day fund - a safety net for big or unexpected expenses. For instance, recent rain and floods caused some unexpected costs, where home repairs or mould cleaning hit a lot of households. A prang in your car would count here, where maybe a new paint job is needed to repair a scratched up door. And so this savings account should earn decent interest and have no card attached, so you’re not tempted to spend it.

Now you could have a fourth bucket to put aside money for things like travel, a new car or other major costs like a home reno. Big savings goals, if you will. This money should also earn the best interest possible so that you can keep it growing, and so a top savings account - or a high interest saver - could work. I have actually been thinking a term deposit could be suitable too, where you can earn a sound amount of interest and must lock the money away for a fixed term. For example, Judo Bank has a 2-year term that offers 3.5% right now. My Life Finance also has a good two-year term with 3% interest. These types of accounts might help but remember you can't touch it until the term ends, or you'll end up with a penalty fee.

The 50-20-30 rule

Finally, the amount of money you put in each bucket might differ to the next person, however it seems the more common break up is to split into three, not four, and use the "50-20-30" rule. That is, 50% for your main "must pay" expenses, 30% for your wants such as eating out, TV streaming or hobbies, and the final 20% on savings goals - the things you hope to save up for. This break up was made famous by American politician Elizabeth Warren.

Three seems manageable to me but maybe doesn't account for the "emergency rainy day fund", which surely some of us would benefit from. I suppose it all depends on how comfortable you feel with your ability to save from the get-go. Doing that initial scribble on a pad of paper and drawing a few actual buckets first, really might be the most crucial step to better money management.

If you’re on the hunt for a new savings account, perhaps check out our Savings comparison page to find one that suits you.