Saving money is hard. We get it. The truth is, most of us never feel like we have “extra” cash laying around that we can just hide away in a savings account. So, if you’re wondering how to start, congratulations. That’s an important first step to creating a budget and savings plan to help you manage your financial future.
Give Your Money a Job
Look at the money you have and give every dollar a single job. Set money aside money for bills, groceries, gas, energy bills, utilities, and phones—all your monthly expenses. As you track your spending, you’ll see where the money goes and get a clear picture of what’s left for non-monthly expenses.
Paying closer attention to your spending habits will also help you identify spending that may not be necessary or important. Can you unsubscribe from some of those streaming service apps? Do you actually use that gym membership? Are those impulse buys on Amazon really that important? As you dial this nonessential spending in, your savings will increase.
Consider the following groups of expenses when it comes to savings:
Things you have to save for
These are non-monthly expenses that you know will occur at some point. Some of them are entirely predictable, and others are
not. Examples of both types include:
Predictable Non-Monthly Expenses:
- Annual car registration
- Holiday shopping
- Annual subscriptions
Unpredictable Non-Monthly Expenses:
- Car repairs
- Medical and dental bills
- Vet bills
Things you want to save for
Now that you’ve covered the essentials, let’s get down to the fun. Start by identifying the things you want to save for. Consider starting small, like saving for new clothing or tickets to a show you really want to see. But you can start planning for a trip to Paris or a ski vacation in Aspen too. Set up your accounts, and watch the balances grow. Your budget can help you make this happen.
Setting up Your Sub-Accounts
Determining your savings categories will help you budget accordingly so you can track your progress and know where you’re at when you need to access funds to pay a bill or deal with a problem. Consider the following categories to start:
Emergency savings
Ideally, setting aside three to six months income in case of a job loss or disaster would be great. But it’s a lot. A $1,000 emergency fund is a good place to start but consider aiming higher once you get there.
If you’re risk-averse, a bigger emergency fund category can give you more peace of mind. If you have large financial responsibilities like kids or a house that needs maintenance or repairs, a bigger emergency fund might make sense.
Health and medical savings
Set aside funds to cover copays, uncovered balances, prescriptions, eyeglasses, elective treatments, and other cash outlays that health insurance doesn’t pay in full. Consider a health savings account (HSA) or flexible spending account (FSA). Both are designed to help you cover qualified medical expenses, but they are different.
What is an HSA?
Designed to cover qualified medical expenses, an HSA can either be sponsored by an employer or opened by an individual. To open an HSA, you must:
- Be covered under a qualified high-deductible healthcare plan (HDHP)
- Not be covered by Medicare or any plan that is not a qualified HDHP
- Not be claimed as a dependent
HSA contribution limits for 2024 are $4,150 for single individuals and $8,300 for families.
What is an FSA?
An FSA also allows you to save for medical expenses, but you don’t need to be enrolled in a high deductible plan to qualify. Your employer only has to offer an FSA benefit. The FSA contribution limit for 2024 is $3,200 regardless of whether it’s for an individual or a family..
Car repair or new car savings
This one’s pretty straightforward. If you own an older car that requires regular maintenance, set aside enough to cover expected repairs, oil changes, tires, wiper blades, etc. Consider setting more aside in case a big repair is necessary. There are reliable estimates for annual car repair costs online. You may also consider setting aside funds for a new car down payment if that’s your goal. Calculate the price and decide what you can afford. The larger the down payment the lower your monthly loan payment will be.
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FAQs
Or, if you want a less-granular approach, set up buckets based on the category of the expenditures. For instance, you might put aside for a “need” expense, such as health care, a “nice-to-have” expense, such as new kitchen appliances. A separate “luxuries” account might be used to save for your ocean cruise next year.
What are the 7 buckets of money? ›
We'll discuss seven common savings buckets below: emergency, rainy day, sinking, vacation, splurge, medical, and long-term. While not all of these categories will be applicable to everyone, understanding what's available may help you decide what could work best for your financial situation and goals.
How should I categorize my savings? ›
Categorize
Bucket 1: Funds for short-term goals, say within the next two years, like a wedding or nice vacation. Bucket 2: Money that you expect to need over the next three to 10 years, like a down payment on a home. Bucket 3: Savings you expect to tap no sooner than 10 years from now, say for retirement or tuition.
What is the bucket method of savings? ›
Bucketing is a smart way to manage your money without complicated budgets or spreadsheets. The idea is to set up multiple bank accounts called 'buckets' and use each one for a specific purpose, like bills, savings or entertainment.
What are the 3 money buckets and what should be in each of them? ›
These buckets are based on the time horizon for when the money will be required-immediate, medium-term and long-term. 3. Immediate bucket holds money in liquid assets, medium-term bucket in income assets, and long-term bucket monies in growth assets.
What are the 5 financial buckets? ›
Many people spend money without thinking too much about where it goes. They spend mindlessly. But if you break down how your paycheck is spent, you'll find that every dollar you earn usually ends up in one of five 'Money Buckets': Society, Past, Present, Future, and Compassion.
What is the 50 30 20 rule? ›
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
How do you divide savings into buckets? ›
How to start bucketing your budget
- Figure out what your regular bills and expenses are. ...
- Give some thought to the future you're building. ...
- Decide on your buckets. ...
- Decide where you'll keep your buckets. ...
- Give each bucket a value. ...
- Set up automatic transfers. ...
- Rebalance your buckets when you need to.
The Big 3, food, transportation, and housing, are the big-ticket expenses making up the majority of your spending.
What is the $1000 a month rule for retirement? ›
Understanding the $1,000-a-Month Rule: The $1,000-a-month rule is a simplified formula designed to help individuals calculate the amount they need to save for retirement. According to this rule, one should aim to save $240,000 for every $1,000 of monthly income they anticipate requiring during retirement.
An area chart is essentially a line chart — good for trends and some comparisons. Area charts will fill up the area below the line, so the best use for this type of chart is for presenting accumulative value changes over time, like item stock, number of employees, or a savings account.
What is the 70 20 10 rule for savings? ›
This system can help you get better acquainted with what you earn and where it goes, while tracking your daily spending (that's the 70% of your after-tax earnings) plus debt repayment and saving (the 20% and the 10%).
How many savings buckets should you have? ›
If you're working toward more than one financial goal, you might be wondering, “How many savings accounts should I have?” It may be easier to manage just one, but opening a separate savings account for each financial goal can help you track, prioritize, and even accelerate your progress.
What are the 4 buckets of financial planning? ›
The first bucket is predicated on expenses for the first three years of retirement and contains cash. The second bucket contains very conservative assets, “because they're up next,” Schoenhardt says. Bucket three is in growth and income investments, and four is more focused on domestic growth.
What is the 7 rule for savings? ›
The seven percent savings rule provides a simple yet powerful guideline—save seven percent of your gross income before any taxes or other deductions come out of your paycheck. Saving at this level can help you make continuous progress towards your financial goals through the inevitable ups and downs of life.
What is the best retirement bucket strategy? ›
Divide your assets into buckets for the short, medium, and long term. Each bucket has a risk/reward profile to match the time horizon. Periodically weigh the contents of your buckets versus your upcoming needs and “pour” your money from bucket to bucket.
