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The Bucketing Method: 7 Important Savings Categories
Jenius Bank Team8/9/2023 • Updated 8/20/2024
Splitting your savings into different categories may help you manage your money more effectively. Whether you're just beginning your savings journey or you’re an experienced saver looking to refine your approach, bucketing your savings into categories or fund types may help boost your overall financial wellness.Each savings category in your plan serves a distinct purpose and may help you stay organized and focused on your financial goals. 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.
Key Takeaways
- Creating different savings funds may help you manage your finances better.
- By allocating money to specific categories, you may be able to resist the temptation to spend impulsively and stay on track toward your goals.
- Each savings bucket serves a unique purpose and could help you cover a diverse set of short and long-term areas of financial wellness.
Why Should I Categorize my Savings?
Categorizing your savings could help you reach your short and long-term financial goals over time by making it easier to track your savings and monitor your progress. But these categories do more than just make it easier to see where you stand. Here are a few key advantages to splitting your savings into different buckets or categories:- Developing self-discipline to define specific savings goals and prepare for the unexpected
- Simplifying how you track saving progress by goal
- Creating a tangible method to ensure you allocate funds across multiple goals
- Reducing the temptation to spontaneously spend money that's intended for other purposes
7 Common Saving Categories and Funds
Let’s get into some of the different saving buckets people tend to use.Emergency Fund
An emergency fund acts as a financial safety net for unexpected circumstances. It helps cover essential expenses during times of crisis, such as job loss, medical emergencies, or urgent home repairs. Experts often suggest having 3-6 months’ worth of essential expenses saved in this fund.1When calculating how much to save in your emergency fund, consider only vital expenses and exclude things you could cut out during a financial crisis. Vital expenses typically include items such as:2- Housing
- Groceries
- Utilities
- Insurance
- Transportation
- Minimum debt payments
Rainy Day Fund
While an emergency fund is for major crises, a rainy day fund is designed to handle smaller unexpected expenses. It serves as a buffer for those minor financial surprises, such as car repairs or appliance replacements.Aim to save anywhere from a few hundred to a couple thousand dollars in your rainy day fund, depending on your lifestyle and comfort level. This fund may help provide peace of mind and to help prevent you from dipping into your emergency fund for minor setbacks.Sinking Fund
A sinking fund is a saving strategy for planned expenses or specific goals. It allows you to set money aside over time to meet future financial obligations, such as a down payment on a car or a home renovation. A sinking fun may also be useful for expenses that occur on a quarterly or semiannual basis.The term "sinking fund" originated in the business world and referred to a company setting revenue aside for a period of time to fund a future expense or repay a debt.3To determine how much money should go in your sinking fund, calculate the total amount you need for your specific goal. Your next step is to divide the total by the number of months available to save. Finally, make a line item in your budget, or whatever tool you use to track your money, to ensure funds consistently go into your sinking fund.Vacation Fund
A travel or vacation fund is a great way to save for your dream getaway. Whether you're planning a luxurious vacation or a budget-friendly adventure, having a dedicated fund could help you travel without worrying about the impact on your normal monthly expenses.You may choose to add to this fund on a regular basis so that funds are available whenever you decide to take a trip. Or you may use this more like a sinking fund where you figure out how much your next trip could cost and add to the fund until you reach your goal.Splurge Fund
In addition to saving for your financial goals, it's important to indulge yourself from time to time.That's where a splurge fund comes into play. This fund allows you to treat yourself to little luxuries guilt-free. Allocating a small percentage of your income to a splurge fund may help provide the freedom to make spontaneous purchases or rewards without derailing your financial plans.Medical Savings Account
Medical expenses are often a significant financial burden, even if you have health insurance coverage. Creating a medical savings account may help you proactively manage these costs.While some individuals have access to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) through their employee benefits, others may not. Setting aside funds specifically for medical expenses could provide a financial cushion if you’re suddenly injured or ill… and that could be even more important as you get older.Recent statistics show that the average cost of a three-day hospital stay was $30,000.4 With the average hospital stay lasting 4.6 days, you could have a bill over $13,000. While health insurance may cover some or all of these costs, most plans require patients to pay at least part of the bill.5By establishing a medical savings account, you may be better prepared to handle unexpected healthcare costs.Long-term Saving Funds
In addition to the short-term savings categories we’ve discussed, it's important to allocate funds toward long-term financial goals, such as retirement or college.Retirement accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s, are specifically designed to help you save for retirement. These accounts offer certain tax advantages and are an important part of long-term financial planning.Similarly, college savings accounts, like 529 plans, allow you to save for your children’s education expenses. These accounts may provide tax benefits and help you prepare for the rising costs of higher education.When considering long-term savings options, it’s best to consult a financial advisor.How Should I Implement Savings Categories?
Everyone has a different money management style. The system you use to monitor your buckets of savings will depend on what works for you.If you’re already a money tracker or even a budgeter, you may just use your tracking tool (spreadsheet? app?) to break out your savings line item toward different goals. That can totally work!If you need something even more concrete, you can always set up different savings accounts for different savings purposes.Your longer-term investment accounts are already separated by design, namely your IRA, 401k or 529 as mentioned. But setting up specific accounts for savings goals, like a wedding, a car, or even a home, could make a difference in your saving discipline. A high-yield account could help to maximize your savings effort too! Think of how satisfying it would be to watch the account grow… and potentially even earn interest!When saving is fun it makes financial wellness feel even that much better.Final Thoughts
By putting different savings categories into action, you may be able to achieve a more secure financial future. When choosing which type of savings fund to open, it’s important to assess and prioritize your financial goals.Remember, building wealth is a journey, and it's never too early or too late to start saving smarter. Whether you're preparing for emergencies, planning for specific expenses, or investing in your long-term security, each category plays a role in your overall financial well-being.Money ManagementSaving & Checking