Have you ever had trouble saving for a goal?
You’re not alone. Many people I talk with have one savings account, where their paycheck is deposited and bills are paid. The one account supports their mortgage or rent, car payment, car insurance, food, vacations, and bigger short-term goals.
It’s a tough system. It’s not designed for successfully reaching multiple goals because you can’t see the different goals. If you can’t see them, how do you know you are on track?
The solution: savings buckets.
What are “Savings Buckets” or “Bucketing”?
Think back to your childhood years and your piggy bank, but instead of one piggy bank, you have multiple piggy banks for each goal. You might have one for the candy store, another for a new bike, and one for the toy store.
Simply, it’s creating different savings accounts, or savings buckets, for each goal or major expense.
How I Used Savings Buckets Growing Up
I’ve been using savings buckets for as far back as I can remember, before I knew about the concept of savings buckets. My credit union had what they called “sub-savings” for each savings account.
In a nutshell, I had one savings account and one checking account, but under the savings account, I could open seven different “sub-savings”, each with a different name and showing as a different account, but it was tied to the main savings account with only one account number.
As a teenager, this made it easy to save for different goals. I also could easily track my progress. Instead of everything muddled in one savings account, I could track my progress for bigger goals and see what was available to spend.
For example, I knew I had to pay my insurance premium every six months and it was $600, so I moved $100 a month into the “sub-savings” titled “insurance.”
By planning ahead and putting it on autopilot, I did not need to drastically cut my spending in the months where my insurance premium was due.
If I wanted to take a vacation that cost $500 in a year, I saved about $42 a month in a separate sub-savings titled “Vacation.” As I made money, I funneled money into this account. It kept me accountable because I knew what money was earmarked for vacations. If I was not able to fund it one month, I could not take the vacation on the same timeline, unless I could make it up in later months.
Looking back on it, I am extremely grateful for this feature. It’s been a critical part of developing my savings habits. Some banks are just now rolling out similar concepts.
What are Common Savings Buckets?
As with budgets and finances, each person has a different system. You need to find the system that works best for you. I’ll share what I use, as well as what other people recommend.
Personally, I divide my accounts like this:
- Emergency Fund
Why do I use these buckets?
For one of two reasons:
- They are larger expenses I pay once or twice a year for which I need to save on a monthly basis
- It’s a specific, larger spending goal I am working towards
For example, I don’t have any specific home repairs or renovations I want to do in the future, but I know home maintenance costs pop up. My roof may only have a few years left on it. The appliances are over 10 years old. Gutters leak. Unexpected expenses happen.
Since I don’t have a specific amount in mind, I set aside about 1% of my home purchase price annually. Many sources suggest 1-4%. Since my home is newer, I am saving on the lower end. Each month, a portion of my paycheck automatically goes into the “Home” sub-savings account that over a year will equal 1% of the home purchase price. When the stove needs replacing, I will have enough. If the gutters leak, I can pull from the sub-savings account. When the roof needs replacing, hopefully I will have enough.
In the case of the car, I know I’ll want to purchase a car in the future. I started this goal as soon as I bought a new car. As soon as I purchased it, I determined when I wanted to buy my next car. I decided I wanted the option in seven years, but I may wait longer.
Since I want a SUV with all-wheel drive for the Pacific Northwest winters, most cars will set me back around $30k. There are 84 months in seven years, which means I need to save about $358 per month to reach my goal of paying cash. I also know my current car will need maintenance, which means I need to adjust the monthly savings. Each paycheck, about $425 automatically goes into the car sub-savings account to cover maintenance and a new car purchase.
Note: Someone could argue for conservatively investing a portion of this money instead of using a savings account because the purchase is more than five years away. That is a reasonable approach, but does not fit with my risk tolerance for shorter-to-medium-term goals.
Do you see what is happening here?
I am allocating my paycheck before it lands in my account. These transactions, along with my longer-term investing goals, take place on the first or second of the month. By the third day of the month, I know what I can spend for the remainder of that month.
Since my other goals are being met, I don’t need to budget. It does not matter how I spend the rest of the money. If I want to go to a fancy restaurant and spend a quarter of it, I adjust how I spend later that month.
If you pay yourself first, the other details work themselves out.
My savings buckets approach won’t work for everyone.
Another common savings buckets structure includes:
- Bills: mortgage/rent, utilities, car payments, child care, health insurance, etc. Anything you receive a bill for each month.
- Living Expenses: groceries, gas, clothing, etc. Anything that does not have a bill associated with it, but you need to live.
- Fun Spending: Movies, restaurants, coffee shops, etc. Anything you don’t need to live, but makes life more enjoyable.
- Savings: Emergencies, vacations, home down payment, etc. Anything larger purchases in the future.
This method works well when you are allocating a percentage of your income to different types of spending, such as the 50/30/20 budget.
This budget divides your spending into 50% on needs (bills and living expenses), 30% on wants (fun spending), and 20% on savings. You can see how it aligns with this bucket approach. You have a percentage of your income go into each bucket every month and you are set.
I don’t like this approach because I like seeing my larger purchases separated. What if I am saving for a down payment and a vacation? How do I know how much is allocated to each? If I have separate accounts, it almost becomes a game trying to see how quickly I can reach my goal.
If you are unsure how much to allocate to each goal and want to get a better idea of understanding your cash flow first, you can read here.
Now that you know the concept, you can design a structure that works best for you. It’s best to copy another approach and then adjust. You know yourself best and what you will need to change.
How Do You Set Up Savings Buckets?
As I mentioned earlier, not every bank has a sub-savings or savings bucket feature.
If yours doesn’t, consider opening multiple savings accounts with the same bank. The downside is each account has its own account number, account minimum, and tax reporting. If your bank has fees, this method won’t work because each account may incur minimum fees. In general, I don’t like using banks that charge monthly service fees, low balance fees, or fees for statements. There are plenty of good banks with low minimum account balances that don’t try to charge you for everything.
When it comes to banking, I prefer simplicity.
My credit union has a sub-savings feature, and I still use them for some goals, but for larger goals where I am holding cash longer, I want something that offers a better yield than my credit union.
Ally has a savings buckets feature.
Instead of multiple savings accounts, you have one savings account with savings buckets. They have common buckets you can use or you can customize it.
A great feature about their savings buckets is you can automatically transfer money into the buckets with each deposit. For example, I have a monthly deposit that is distributed by these percentages:
These percentages translate to dollar figures to reach my monthly savings goals I described earlier. For example, if I deposit $100, $47 is transferred to the home, $32 to vehicles, and $21 to vacations.
As you can see, Ally makes it easy to automate your savings buckets. You’ll need to decide what works best for you – multiple savings accounts, finding a bank or credit union with sub-savings, or using a bank like Ally with savings buckets.
Either way, many people find the savings buckets approach useful.
Savings Buckets Summary
Saving for a goal using one account is challenging.
Each dollar can only be assigned to one purpose. If you can’t see the dollars split out by purpose, you can’t see your goals. If you can’t see your goals, you’ll have a hard time achieving them.
As we grow up, we tend to make life more complicated. Bank accounts and savings goals should be simple. Don’t make it complicated. Make it simple and make it work for you.
Are you currently using savings buckets? If so, I’d love to hear how you are using them and which bank you use.