What’s the point of assigning my money in to “buckets”?

I talk a lot about Spending Plans and Budgets (which are essentially the same thing) and the importance of tracking your monthly expenses as separate line items or “buckets” and creating Sinking Funds for upcoming expenses. When introducing the concept of dividing your money in to “buckets” many people are confused at the rationale for doing so. What’s the difference if it’s in one big pile or if it’s divided up if the amount of money is the same? A dollar is a dollar is a dollar, right?

Yes, rationally and mathematically that is true. It shouldn’t make any difference. But numerous studies done on personal finance habits all show that framing your money in to separate buckets results in more successful outcomes when it comes to living within your means, staying out of debt, and building wealth.

There is an aspect of money that is beyond just numbers and math. We create all sorts of emotional and symbolic ties to it. If it were only about logic and math, then no one would ever be in credit card debt.

Separating your money out in to buckets is one strategy to help control the emotional component out of your finances. When a big pile of money is sitting in your account after each pay cycle, there is a natural inclination to spend more frivolously, which increases your chances of not having enough to pay for expenses closer to the end of the month. It’s like what we do with toothpaste. When it’s new and full we just squeeze it out of the tube without thinking. But once it’s starting to get down to almost nothing we’re using all of our strength to get those last little bits out. (Don’t lie. You ALL do this!). By setting intentional plans for each dollar you are taking the reins on your money and telling it where to go and making it work for you.

People know this so well that they will take steps to eliminate all areas of temptation to dip in to other buckets. For some, having a spreadsheet or ledger that shows where all the money is assigned works for them. For others, they will actually have separate bank accounts for different purposes. In one article I read a woman actually had opened an account at a bank and hour away and cut up the ATM card for that account because she couldn’t trust that she had the self-control to not dip in to that account.

This financial habit is the key to having control over your money. If you’re not already doing this, give it a whirl.