Organizing your total financial picture can seem overwhelming. Even paralyzing. You know you want to get a handle on your money, save more, get out of debt. But what to do first? What’s the right decision for this or that?
Here I’m all about simpler, smarter money management. And this post is all about the core structure I use as a foundation for that simpler, smarter strategy. It’s step one of simplifying your organizational approach to money.
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What's In This Post
The Four Buckets
The foundation for a simpler money management plan starts with the issue most relevant to your day to day money management: your monthly cashflow. I recommend organizing personal finances by month in this way because 90%+ of bills are paid on a monthly basis. Everything else you do with your money will stem from first nailing down this monthly cashflow.
More specifically, I like to organize monthly cashflow into four simple buckets. Once you define these four buckets, you can optimize and tweak your financial picture one strategy at a time, without getting overwhelmed or lost in the minutia.
No budget categories, no sinking funds. Just strategic allocation of income across four simple and continually adjustable areas.
Meet myfour monthly cashflow buckets: 1) monthly bills, 2) debt attack, 3) savings, and 4) spending. Could you create more categories? Of course. People do it all the time. But resist the temptation!
The point here is to keep things dead simple. For instance, you may be tempted to have a separate bucket for giving or investing. Seems logical, right? But it’s important these are folded into just these four buckets. The buckets are much more about how that money is managed in your cashflow, not about what the money is used for. So automated monthly giving, as outgoing money, fits into the monthly bills bucket. Sporadic donations fit into the spending bucket because that outgoing money isn’t recurring on a monthly or more frequent basis. Investing, on the other hand, goes in the savings bucket because it is a type of “wealth building” rather than outgoing money. Starting to make sense?
Let’s talk about each bucket to help clarify how they each work to conceptualize and optimize the flow of how your monthly income is used:
#1 Monthly Bills
The key characteristics of items in the monthly bills bucket are 1) outgoing money, and 2) recurring on a monthly or more frequent basis. It’s your fixed expenses, but focused exclusively on those that recur monthly or more often. So, this bucket generally contains utility bills, monthly insurance premiums, rent, cell phone, childcare, etc. It also includes monthly debt payments, like installment loan payments (mortgage, car loan, student loans) as well as credit card minimum payments for any cards carrying a balance past the grace period – something you’ll avoid ever happening again once you have your total money strategy down! 😉
#2 Spending
The spending bucket is also outgoing money, but for things that are in your day to day control. Unlike your recurring monthly bills, the spending bucket includes things that can be changed in every moment that you decide to spend, not spend, spend more, or spend less. So this bucket can be very rapidly reduced, and just as rapidly blown up! It encompasses all your day to day, week to week spending on all your wants and needs. Everything from gas to groceries, lattes to lipstick, all the daily choices you make trading money for something else.
The total sum for this bucket equates to your monthly spending cap when you set up a burn rate budget, a key number because it is the one number that connects your big-picture financial well being to your day to day life choices. It’s the easiest number to rapidly cut downandthe easiest one to blow out of the water.
#3 Debt Attack
The debt attack bucket isextramoney paid against debts to reduce/eliminate balances faster. It’s money over and above what is due as part of your usual monthly bills.
For example, your car loan payment might be $372 (part of your monthly bills bucket). But you might have $50 in your debt attack bucket which can be tacked onto that car payment (assuming that’s your current debt target!). So your total car payment becomes $422 instead because of the $50 you’re currently allocating to debt attack.
So this is a bucket where you aim to shift money towards when your goal is to pay off debts! As debts are paid off, that portion of money that was previously dedicated to servicing the monthly payment you just eliminated can easily grow this debt attack amount. That’s the snowball concept.
Using our example above, once the car is paid off, that $372 is eliminated from your monthly bills. Instead, you shift it to this debt attack bucket to use towards your next debt target, along with that $50 you already had allocated for debt attack. That’s $422 of extra money to pay over and above your usual payment to your next debt target. You can see how that accelerates things fast!
#4 Saving
The savings bucket is your bread and butter. This is meant to include monthly cash savings and investing, any activity that grows wealth. Shoveling money into your savings ensures you’re ready for the unexpected, smooths out your cashflow with a plan for irregular expenses, and, in combination with investing, ultimately will fund your dreams! How to manage and fund your savings strategy is your next step & is covered in this post.
But for now, just know you need to pile up any and all money you can in savings. Think of the monthly bills cycle as your maintenance mode, and savings as the fuel for living life. Avoid the trap of spending, spending, spending to achieve some sort of desired lifestyle, robbing yourself of your ability to fund the bigger, more important stuff because you never save enough. Instead, prioritize saving a set amount every month first, even if it’s something small. You don’t build your best life through your day to day spending. You do it through careful, intentional use of your savings.
For 7 habits that literally put money in the bank, check out this post!
Setting the first targets: start-up numbers
Identifying a target number for each bucket follows the simple formula below. In this way, you keep your cyclical monthly cashflow predictable and steady.
Monthly income = monthly bills + monthly savings + monthly debt attack + monthly spending
The trick is calculating these monthly numbers in the best way to give you a strong and strategic foundation for optimizing in the future.
Determine monthly income
Start with calculating monthly income, as everything else flows from there.
When estimating income, lean towards estimating low. This leads you to pleasant surprises down the road, instead of unpleasant ones.
Also, treat each month as if it contains 4 weeks when calculating monthly income. So, if you get paid every two weeks, you estimate monthly income as two average paychecks. Or if you’re paid weekly, you estimate based on four paychecks. The ‘extra’ paychecks that come in other months are one of your secret weapons to fund your savings! So don’t include extra paychecks or other sporadic income (tax refund, bonuses, etc.) in calculating your monthly income here. For more detail on how to estimate your monthly income number, I like the “lowest probable income” approach discussed in this post at Atypical Finance.
Determine monthly bills
When estimating monthly bills, you want to estimate on the high end. Again, this leads you to pleasant cashflow surprises in the future, instead of unpleasant ones. And, in that same vein, when estimating monthly bill amounts, now you calculate based on a month containing 4.33 weeks. So multiple your weekly daycare payment by 4.33, for example, to get a monthly number. To help you organize all your bills, their frequency, and calculate a total monthly bills bucket estimate (as well as help you visualize your allocations to the other three buckets) you can grab the Magic Monthly Number Workbook.
Get it instantly for free right here 👇
Strategic allocation to your buckets
With your income and monthly bills estimated, substract the monthly bills total from the monthly income total.
Now you have a dollar total you can strategically allocate across the more variable three other buckets: saving, debt attack, and spending. This number I call the Magic Monthly Number 😉 It’s the total you can shift around to help achieve your goals.
Pick a target to send to savings each month and automate it. Start small if you need to.
Pick a target to apply towards debt attack and automate it into the payment for your current debt target (figure that out here).
Then what’s left is your spending money…
To operate under the limit of what’s left for your spending bucket, learn the burn rate budget to maintain simple, category-free spending control.
If you’ve never had a clear spending limit before, remember it’s just fine to start with some very small amount to automatically deposit to savings each month, nothing in debt attack (just maintain those minimums due), and the rest for total monthly spending.
If (or when) you’re ready to put more towards savings, or your savings growth is in good shape and you’re ready to start tearing down your debt, shift money out of spending to support those aims.
Just keep making changes to your expenses and spending to achieve greater growth in your saving and debt attack. Over time, once you’ve paid off all your desired debts (like all high interest debt, consumer debt, whatever your key elimination list is), your debt attack bucket can disappear!
Optimizing: shifting money across buckets
As you’ve learned, these four buckets each have a little different purpose and, therefore, a little different strategy for tweaking them. So, instead of umpteen different “budget” categories, there’s just these four areas to tweak and optimize your finances.
With this structure, you can build towards your goals over time, with each strategic spending cut, or debt payoff, or bill reduction. Where one bucket changes, another changes in response. Just keep tweaking over time, one step at a time.
To get you started, here are some ideas for 1) reducing your bills bucket and 2) more feasibly sticking to a lower spending cap… both areas that help shift money away from the bills and spending buckets in exchange for loading up your debt attack and savings buckets! Woot!
Ideas for shrinking the monthly bills bucket:
- Make smart choices about your biggest cost,your home
- Understand the importance ofappreciation and loan lengthswhen buying a house
- Cut cable & use a short list of preferred streaming services instead
- Switch to VOIP home phone service (we’ve used this company for ages… basic phone service is now free!)
- Look into better value cell plans or go with anMVNO cell phone providerandpay $12 like Mrs. Frugalwoods (we recently switched to Mint Mobile… soooo much less than our Verizon plan was)
- Buy plenty of term life insurance coverageearly, when you are young and healthy, to get the lowest rates
- Make a thrifty vehicle choice, and delay the impulse to upgrade your vehicle. Repairs might seem expensive, but so is a loan on a depreciating asset.
- Reshop your car insurance (I just did this and saved $1200 per year- and got even higher coverage for home, car, and umbrella liability)
Ideas for maintaining a smaller spending bucket:
- Look into adopting a morefrugal mindset, including prioritizing quality over quantity, needs over wants, yourspending valuesover someone else’s
- Utilize whateverbudgeting approachfits your personality to stay below your monthly spending cap. I like things simple and efficient (no categories, no cash envelopes), so I usemy ‘burn rate’ budget method
- Track spending in your high-spend or problem areas as needed to force yourself to think twice
- Use my$10 decisionsapproach
- Rethink yourfood spendinghabits
- Learn how and when to applyto honor your monthly spending cap
- Implement ano spend monthto get some fresh perspective on your spending habits
What about irregular income and expenses?
I’m so glad you asked!
Your irregular income (like those extra paychecks, bonuses, etc.) can go straight to your savings account. Then, use my three-layered savings approach to handle the rest (layer 2 is specifically for all your irregular expenses). Check that post out for the next step in your simpler, smarter money strategy.
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