To recap, you set up three separate accounts (two checking and one savings) to manage your cash flow.  One account is for fixed expenses, the second for variable expenses, and the third account is for savings.  Each week spend money out of the variable account for entertainment, groceries, etc.  Pay bills from the fixed expense account and save with the savings account with an automatic transfer when your pay check is deposited.  For more details about how it works and rules, click here.

Personally, I like to see the monthly budget broken up into more categories versus these three areas, but I completely recognize that even 8-10 categories, for example, may be more than what some people want to manage when setting up a budget.

That’s why I’m embracing this approach.  We’re all different and if this helps someone avoid using a credit card recklessly and overspending each month, I support it.

Beyond the rules and approach to the bucket budget, I’ve thought of a few ideas which I think can make this system perform even better.  If I were going to set up a bucket budget today these are the additional steps I would take to insure its success!

Bucket Budget Tips

Leverage software versus setting up an extra checking account

Use Mvelopes Personal or other personal finance software versus setting up separate checking accounts for fixed and variable spending.  With Mvelopes in particular you can set up two separate envelopes (variable and fixed) and automatically allocate your paycheck to each envelope when it’s deposited into your account and downloaded to Mvelopes.

Keep an eye on a few variable spending areas

Mange a few common problematic areas in the variable expense envelope that can lead to overspending.  Set up sub envelopes under your variable expense envelope for three categories of spending:  groceries, entertainment and clothes.  All other variable spending can stay in the parent variable spending envelope.  Separating spending in these three areas will help you keep a closer eye on spending and avoid depleting the variable envelope too quickly.

Use a high yield online savings account

Set up a savings account, but use an online bank account such as ING Direct Orange savings account.  I’ve recently set up my savings with the Orange savings account and have found it provides an extra layer, in a good way, between me and my money.  It takes longer to transfer it into my checking account than it would with a savings account from the same financial institution as my checking account.  This helps me think twice about using my savings for things it shouldn’t be used for.

How long will it take you to take these three additional steps? 

One of the concerns for some people when it comes to budgeting is the amount of time it takes to set up a budget and then maintain it.  If this is you, check out the below estimates which might change your thinking.

• Set up Mvelopes:  15 – 20 minutes to sign up, set up your envelopes and enter your financial institutions for automatic download of transactions.
• Set up ING Savings Account: 15 – 20 minutes set up time and 2 – 3 days for account activation.

How long will it take you to maintain your spending each day with the Bucket Budget approach and these tips?

For all the envelopes mentioned, you might spend 5 minutes per day assigning downloaded transactions to the appropriate envelope and reviewing the balances.  Tip:  assigning transactions in Mvelopes is easy.  After they automatically download from your financial institution you can drag and drop them to the appropriate envelope.  I’m sure other programs do the same.

• Total estimated time to invest in cash flow management each week:  25 minutes (5 minutes per day)!
• Total cost:  Mvelopes has a free 14 day trial and monthly charges for as low as $7.90 per month (2 year plan)
• ING Direct Orange Savings currently pays you 1.3% interest.  Learn more by clicking here.

What are your thoughts on the bucket budget approach and using these tips to further the effectiveness of it?

 Here’s how a bucket budget works

1. Set up three bank accounts (two checking and one high yield savings).
2. Figure out how much of every pay check you want to put towards savings and have that automatically sent to the savings account.
3. Send the rest of your pay check to checking account 1.  Pay all monthly fixed expenses (standard bills such as mortgage, utilities, internet, etc.) out of this account.
4. Figure out your monthly surplus after paying fixed expenses and divide by four (approximately 4 weeks a month).  Set up a weekly transfer from account 1 to account 2.  This is for variable expenses such as groceries and entertainment.

Follow two rules

• You can’t transfer more money over until the next week (no cash advances for variable expenses).
• You can’t use credit cards.

There are a lot of possiblities with this approach.  Consider the below practical ideas

• Give or tithe  and pay extra on debt out of account 1.  Make these fixed expenses!
• Use the savings account until you’ve saved up $1000 emergency savings.  Once established, send that money into account 1 to pay extra on your debts.
• Once you get the hang of the approach and start living off account 2 for variable expenses (remember the two rules), try dividing the money for account two into specific spending categories. Start managing how much you’re going to spend for entertainment and other variable expenses to help prevent over spending.

Recap of the bucket budget

• Savings Account:  Automatic transfer from your pay check for savings.  Forget about the money in this account.
• Checking Account 1:  Remaining amount after savings automatically sent to this account for fixed expenses (include giving and debt reduction payments out of this account).
• Checking Account 2:  Remaining amount after fixed expenses automatically sent to this account for variable expenses.

Do you think you could use this approach to budget your money wisely?

Source

• Money Magazine (June ’09), “Discover Your Budget Style”