Managing cash flow tends to be an issue for most people regardless of the income level. On one hand, you have known expenses, but there are always some that catch you off guard. My husband and I have done a few iterations of cash flow management and have found one that works for us. It is a “bucket” or “envelope” system that I have illustrated below. We use five “buckets” (bank accounts), each with a different purpose. Using five accounts may sound more complicated, but bear with me – it actually eliminates confusion and cuts down on surprise expenses. Here is the run-down:
We each bring home a paycheck twice per month. On a pre-tax basis, our contributions to our 401(k)s, and flexible spending accounts for health care, and dependent care come out automatically. After taxes, the net dollars are split up as follows (see image and explanation below):
Bucket #1 – Online Bank
This is our emergency fund. We use an online bank to keep these funds “out of sight, out of mind” by not keeping them in the accounts we use for monthly expenses. We also benefit by using an online bank because they are paying a 1% interest rate, which is better than most brick and mortar banks are offering at this time. This account is linked to our regular checking accounts so that we can transfer funds as needed. We have a direct deposit from our paychecks set up until we get to a balance that we are comfortable with. The target is to have 3-6 months’ worth of fixed expenses in this account that are available and liquid in the event of an emergency. What counts as an emergency? A loss of income, hospitalization, issues with the home that need to be fixed quickly (think flooding, broken windows, freezer breaks, etc.). We basically try to ignore this account and let it grow so it will be there when we need it.
Bucket #2 – Checking Account 1
This bucket is for our fixed expenses that happen regularly. They are known amounts and we set them all up on auto-pay if possible. These are expenses like the mortgage, cell phone bills, trash service, daycare tuition, cable, and even regular expenses like our Amazon Prime Subscribe and Save Items that are the same each month. This account also pays for expenses that happen once a year in known amounts like life insurance premiums, membership fees, and real estate taxes. We calculate how much these cost each year and divide by twelve. We have that amount deposited each month into this account so the annual amount will be available when the bill is due.
Bucket #3 – Savings Account 1
This is for known expenses that vary in amount and timing. For instance, vacation and travel, tickets to sporting events, Christmas gifts, and larger purchases like furniture or electronics. We simply estimate how much we’ll need for the year for these items and divide by 12 to determine how much we want to allocate each month. When we need the funds to book a trip or make a purchase, we simply transfer the funds to Checking Account 1 (above) and pay for it.
Bucket #4 – Savings Account 2
This bucket is our house project fund. We have identified several things we’d like to do to our home and also maintenance items that will need to be done eventually like replacing the roof. We build this bucket up with monthly deposits and when it reaches a certain amount we decide if we want to start on a project. When we are ready to use it, we simply transfer the funds to the Checking Account 2 (below) and start cracking!
Bucket #5 – Checking Account 2
This is the “2-Week” account that is a catch-all for basically everything else. These are weekly expenditures for gas, groceries, restaurants, personal care, coffee runs, Uber/Lyft rides, etc. Since all of our other goals are being funded, this account can go to $0 each pay cycle. This is the account we use most often, in the form of a debit card. It also forces some communication between my husband and I about the expenses we expect for the next two weeks. If we know we’re going on a Costco run that will cost a few hundred dollars, we know to spend less in other areas and may skip restaurants or getting a manicure during that time frame.
If you are struggling with cash flow management, give this “bucket” approach a try! You may need more or less buckets depending on the expenses you have and want to fund, but having funds earmarked for specific goals and expenses has really helped my family and several of my clients manage monthly finances. It does take a while to adjust to the new system, so be patient with yourself and give yourself time to adapt. A good time to start the system is when you have extra cash from a bonus or a tax refund to get the buckets started before your direct deposits are set up. Cash flow can be tricky, but if you can plan for what’s coming, you’ll set yourself up for success.