16 October 2015

Savings Stretch Goals

Usually I write about costuming or faith formation, but I like to write about what I am thinking about and currently that is budgeting and saving. My son is getting old enough that he and I have had several conversations about how to make a budget so I thought I would write up my system.

The system I use is frequently called the bucket system. I happened to come up with it on my own and just found out this week that it had a name. In the bucket system you have one pot for each type of regular expense. You treat each bucket just like a bill and pay it monthly.

In my case the buckets are virtual. I have one savings account for each category. My credit union lets me have as many different savings accounts under one checking account as I desire and does not charge extra for this.

When I pay my bills, I put a set amount into each bucket. Some of my current buckets are: monthly expenses, allowance, emergency savings, auto savings, health savings, Christmas savings, tax savings, education savings, and house savings.

Monthly expenses: this money goes in my checking account and includes rent, utilities, medications, pet expenses, insurance premiums, and food money for the month. (Note: I don't leave the paycheck in the checking account.)

Allowance: this is my discretionary spending money for the month. I can spend it on coffee or crafting supples or gifts or anything I like as long as I don't go over the monthly amount. I can also save it to buy larger things that I want.

Emergency Savings: my emergency fund is an unemployment or catastrophic disaster cushion. My goal is to have between 3-6 months of living expenses saved at any one time. It is helpful to make some rules about what this can be used for. In my case, if the roof caved in we could break into this account, but if we want a new TV we need to save for it with other money. It takes a long time to save up a disaster fund so it should only be broken into when all other funds have been exhausted. I tend to convert this into certificates of deposit so it is harder to get to on a whim.

Auto Savings: this is our savings toward a major payment on a car. We currently own a car but eventually it will need to be replaced. If we can save a small amount for 10-15 years we will have a substantial down payment on our next car. This savings is not intended to pay for normal repairs or maintenance. Putting $50 a month away for 10 years adds up to $6000.00-- which is a decent down payment on a new car and will save us loan costs in the future.

Health Savings: we put aside a bit of money each month so that when medical copays, medications, and other health expenses that aren't covered by insurance crop up we have funds to pay them. We figured this amount out by going back over our bills from a previous year, adding up our costs plus a bit for inflation, and divided by 12 for a monthly amount. I like to think of it as pre-paying for medical expenses.

Christmas Savings: we like getting folks gifts for Christmas. Even if we buy inexpensive gifts, it adds up. So we figured out how much we spent in a given year, divided by 12 and now we have cash to pay for gifts or money to donate when we are ready to shop. Having a set amount to spend also keeps us from going too crazy at Christmas and we avoid having a big bill to pay off in January. I want to point out that we are still spending the same amount on Christmas that we did before we started this account, we are just saving up for it instead of putting it on a credit card and earning interest on the money instead of paying interest on a credit card loan.

Tax Savings: we got in the habit of putting some of each paycheck away in a tax savings account over 20 years ago when my husband was a contract worker and we were responsible for all of our own tax withholding. Even when we switched to regular jobs where the employer withheld money for taxes we found it useful to put 5% of our paycheck into a tax savings account. Then if we owed money to the IRS in April we could use that savings to pay it off. If we didn't owe on our taxes then the money we saved became a bonus that we paid to ourselves. We could spend it on anything we liked-- travel, furniture, or just move it to our emergency fund and speed that goal along. Note: if you work freelance and are responsible for paying all your own taxes, we found a good rule of thumb is to put 40% of the gross freelance check in the tax account.

House savings major: We own (or share with the bank) our house. Houses need regular upkeep. In our case, we knew we wanted to remodel the kitchen. We put a set amount away for over 15 years and when our oven finally burned out we were able to combine this savings with a home equity loan and afford a much more major remodel than we had originally thought. Now that this major expenses is done (and we already took care of the bathrooms) I may turn this account into a travel savings bucket.

House savings minor: this is for annual expenses of house upkeep-- things like minor roof repair, furnace service, window cleaning, plumbing emergencies, & other professional goods and services that a house needs on a semi-regular basis.

Education savings: We are putting money aside for our son's college. We started when he was little so have had some compound interest on our side. In just a few years we will start spending out of this account.

The keys to the bucket system are:
1. Don't leave all your money in your checking account.
2. Treat your savings goals like bills, pay them monthly (and have a set budget that you refer to when paying those 'bills').
3. Have a separate bucket for each saving goal-- it keeps you from accidentally double-spending your money.
4. Be consistent, as long as you have a steady income, pay into your buckets.
5. Have clear categories and rules for yourself (and anyone sharing your accounts) for when the money from each category can be used.
6. Use credit cards with discipline. Pay them off at the end of the month and don't buy something on credit without first checking where you will pull the money from to pay it off.
7. When you reach your goal spend the money you saved and enjoy it!

Here is my budget priority for figuring out how to save.

Living Expenses These are the things that let you keep your living situation stable: rent, utilities, food, chronic medications, health insurance, transit (bus or car/insurance/gas) funds an allowance for daily expenses that let you have a little fun. It can be helpful to look carefully at your living expenses and figure out what could be cut if needed and what the bare minimum you need to keep the lights on is-- that amount forms the basis of your emergency fund.

Tax savings This can be a gateway to getting better at savings. If you put money away until tax time and then luck out and don't need to give it to the IRS you have an instant bonus! This is really the way we started saving and realizing that locking in a set amount and declaring it untouchable until a goal or deadline had passed made it much easier to keep from spending the savings that was accruing.

Emergency fund This is your cushion should something drastic like a job loss or major crisis hit you. It is recommended to have between 3-12 months worth regular expenses (which is why it can be good to figure out what your bare bones cost of living are). So if you need $2000.00 a month to cover the basics then the goal is to save between $6,000-$24,000. If you can afford to put $200.00 per month away then you will meet the lower goal in 2.5 years and, if no emergency has happened you can just keep adding until you have an amount that works for you. Generally the more difficult it is for you to find work (due to education, specialization, or other factors) the larger your emergency fund should be. Another way to think of it is that if you can put 8% of your paycheck in your emergency fund then every year you save will give you a month of emergency fund money. This is a good place to put all or most of any bonuses, overtime, windfalls, or any extra money you wind up until you are at your minimum savings goal. The faster this grows the more you contribute to your own stability.

Other buckets Divide up what is left into your buckets and then pay that set amount in every month. Even if it is only $5.00 a month, it adds up. Some ideas for other buckets include short term goals like saving for a new bicycle or medium term goal like saving for a trip to France, and long term goals like saving for a house or for retirement. Back when we were renters, we set up a bucket that was 'downpayment money'.

The bucket system can encourage you to look at what you need as a minimum to stay in your home and then lets you add stretch goals to your life. So if you get a raise or a better paying job or an additional income you can decide where to save that additional money instead of just spending more of it without realizing it.

You can add new buckets, increase your amount of saving for your current buckets, or even give yourself a raise in your allowance, but the key is that you do it deliberately-- that you choose what to do with your money. When one bucket is full you can take the money you were paying into it and add it to a different bucket. If you don't want 10 accounts each getting $10.00 a month, then fill one bucket at a time, or one short-term and one long-term bucket (but keep a list of all the buckets that you want to fill eventually and when one fills up, start the next one).

I can't stress enough the importance of both giving yourself an allowance and treating your savings goals as bills. An allowance that is in a separate account from your savings keeps you from spending your hard-won savings accidentally. Treating savings goals like bills gets you in the habit of taking your own goals just as seriously as the folks at the water company take getting your money. Labeling the buckets with your goals can help you stop yourself from spending money you have 'sitting around' because you have given that money a long-term purpose. You can choose to spend it, but you'll know up front that it will take you that much longer to reach your goal if you do. If you are sharing accounts with someone, an allowance keeps you both from spending into your joint funds or from one of you accidentally spending the rent money.

You can use the bucket system with kids to help them learn about savings and budgeting. You can make physical buckets out of jars, envelopes, bottles, or piggy banks and decorate and label them with the names of kid's goals. So if they want to save for a game, a book, fuzzy socks, or crafting supplies, or an IRA they can label a jar, figure out how much they need to save for how long and then can watch as the jars fill over time. (And you can introduce the concept of matching funds if you want to give them added incentive to save.) When they are old enough to have an account at a bank or credit union, they can take their physical buckets and turn them into virtual ones.

This system grows with you. When we first started out we were living hand-to-mouth and we made a slightly more than our living expenses*. That money went into our only bucket, our emergency fund. (And for a while it felt like every time we got $300.00 saved we would have an emergency that would wipe it out and we'd start over.) Now we have many buckets and they are helping us during a transition to being self-employed, something that would be a lot more stressful than it is given that we did not get to dictate the timing of the employment move.

If you don't already have a system for budgeting and saving money, try the bucket system. If saving sounds like a drag, think of it as controlled release spending. You'll get to spend the money eventually and it's pretty fun (and much less stressful) to be able to do something like shop for Christmas gifts and not have outstanding bill to pay off come January.

*"Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." ~Mr Micawber in "Bleak House" by Charles Dickens

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