Updated February 2020.
Published September 22, 2015.
Save with a purpose.
Most of us need "money buckets" — accounts designated for a specific purpose — to help reach financial goals.
For instance, if you estimated that a trip to Disneyland would cost your family $4,000, then name an account "Disneyland" and set up automatic transfer of $112 to the account each month. In three years, you would have saved enough to make the trip. Hello, Mickey!
"Once you understand the concept of money buckets," says Sherry Wallis, an STCU member and financial educator," it can dramatically change things in a very positive way."
The easiest way to "bucket" your money is to set up automatic transfers at your bank or credit union. There are several reasons this works best for most people:
- Adds to your account slowly and evenly, so you don’t have to go into debt if an emergency strikes.
- Designates your money (paying yourself first) to put you in control. Soon you won't even miss the amount set aside.
- Limits the security risk of stashing cash.
- Earns dividends as you go.
- It's always your money to manage, so you can change the purpose of the account at any time.
Once you understand money buckets, it can dramatically change things.
Three steps to bucketing.
Here's how to get started with your "money buckets" or savings accounts designated for a specific purpose:
Step 1: Establish your emergency fund.
Financial advisers typically recommended you first save 3 to 6 months' of household expenses as an emergency fund before trying to create other "buckets" or designated savings.
But you don't have to save it all at once. Setting aside $100 each month, with a goal of growing your emergency fund from $1,000 to $2,500 is a great place to start.
With your emergency fund set up, any unplanned events such as a failed major appliance, flat tire, or out-of-pocket dental work can be quickly covered without having to use a credit card. Use it, then rebuild the fund before the next emergency!
Step 2: Name your accounts.
If your online banking system doesn't allow you to set up your own automatic deposits or transfers, then visit STCU and ask for help assigning names to your savings accounts. Name your accounts to define the purpose of the "bucket" fund. You could call one "Disneyland," another "Granite countertops," or another "Nancy's wedding" or "Harley."
If it helps, you can use the money bucket system for recurring expenses too. Buckets labeled as "Animal care," "Utilities," "Property taxes," and so on will remind you to set aside a few dollars each month.
Step 3: Fill your buckets automatically.
By using automatic deposit or transfer to fill your "buckets," you'll learn to live without those dollars until you need them.
Ask your employer for help setting up direct deposit of your paycheck to your bank or credit union. Then request your credit union or bank automatically distribute a designated amount from your paycheck to your designated savings accounts to help build your "buckets" for future needs.
If setting aside $100 a month to fund the account is too difficult, then simply pare it back. You can always change the purpose of your savings accounts, rename them, or stop the automatic transfer.
Once you experience the freedom of funding future goals over time, you may never want to stop filling those buckets. You may even decide to add more!