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The 3 bucket theory of money management

October 11th, 2008 by admin | 0 Comments | Filed in UK Bank Accounts, UK Banks

A great personal tool to use in planning your budget, savings and investments is the three bucket theory. It’s so simply and yet so devastatingly effective. I’ve used this tool when advising people who had trouble saving and building a nest egg for investment. I have seen this method revolutionise the spending habits of people in a very short time. If you have an issue budgeting, try it and see if it works for you. The results might delight you! It goes like this.

Picture three accounts which act like buckets. The first account is you current account. This is where your income goes…your wages or your salary. The first step is to sit down each month and work out your known expenses and bills. You pay as many as you can using direct debits and then withdraw a weekly or monthly amount of cash from your current account to have as discretionary spending money, ensuring that you are saving an appropriate amount. If you aren’t saving as fast as you would like, cut back on your discretionary spending money. It’s that simple folks!

Once you have done that, you’ll have an amount left over. This goes into bucket two which is a savings account with a high rate of interest and some penalty attached to it for withdrawing the money inside the notice period. This little trick instils discipline in people who might lack a little bit of will power not to buy those shoes/have that holiday/get the newest gadget. Over time, your aim here is to have between 6 and 12 months expenses in this account.

Once this account is filled up, you then progress to bucket three. This is an investment account which you use to build up your equity base. Once bucket two is filled, all excess income month goes into bucket 3 to get you into the fast lane of wealth accumulation. This is the stock market bucket where long term goals are saved for. In reality, this is your lifetime income bucket. Some day you will use this money to generate an income for yourself to subsidize your pension (which is paid for as part of your living expenses). The faster you fill bucket three to the extent that it can produce a suitable income for you, the faster you can retire.

Try this system out…you might get there a lot faster than you think!

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