Buckets track all accounts, or just checking account?

[Daniel]

Should I be using the buckets for all of the accounts (ie. checking,
savings, cash, credit cards, etc.), or should I just use it for my
checking account? I'm a little confused by this, and wonder how I
would use the buckets for accounts such as cash or credit cards.

Thanks!

Dan

[The Watkinson Family]

Daniel,

You would select which accounts to use for buckets based on their type.  Those accounts that provide money to you to spend on a monthly basis should be included in the bucket system.  These accounts would include:

Checking accounts

Cash accounts

As far as credit cards are concerned, some you might include, and some you might not include.  If the card you use is used for your spending throughout the month, and you pay off the card each month, you would include the credit card in your bucket system.  If it's a card you don't use anymore and that you're paying off over time, you would not include this card in your bucket system.  I do not personally recommend having a hybrid card which you continue to use but are not paying off the balance.  Using the bucket system to track the expenses on this card can get complicated.  However, it is doable, and if this is your situation, let me know.

As far as savings and money market accounts go, some people include them, and some do not.  To explain the advantages/disadvantages of each approach requires me to back up just a little bit.

Using the bucket system assures you that when you make a purchase and do not exceed the bucket amount for the category purchase you are making that you actually have the money to spend on that purchase.  This guarantee is different that just checking the account balance to see if you have money in the account before buying something, because having money in an account is not guarantee that it is available--it may be needed for insurance, mortgage payments, bills, or groceries later that month.  Using the bucket/envelope system allows you take all the cash you have on hand (including money in certain kinds of accounts) and dedicate it toward certain kinds of purchases.  If you don't exceed the bucket amount, you can be assured that the money is available for that type of purchase without encroaching on other planned expenses.

What the bucket system does not guarantee, however, is that you actually have money in a given account.  Because you are combining your cash accounts and your checking account, and perhaps others, as well, it could be the case that the bucket money is not actually in the account you're spending from.  Let me provide a simple, but absurd example.

Cash: $5000

Checking: $50

The total money you have available is $5050, which you can distribute between your buckets.  Suppose you decide to allocate $500 in groceries.  As you can see, this money is not actually in your checking account, and if you were to pay using your debit card, you would over draw the account.  While it is true that you have the money to pay for $500 worth of groceries this month, you do not actually have the money in a particular account.  While this example borders on the absurd, you can see how adding multiple accounts can provide a practical example where you can't just look at bucket balances, but you would also need to be aware of or check your account balance before making a purchase.

So, back to why some people choose to include a Savings account in the bucket system and others do not.  

First, the case for/against including the Savings account in your bucket system.  When you include your savings accounts and money market accounts in your bucket system, you're able to track the money that is in the account with buckets.  This setup avails itself to setting aside money that is for future or infrequent purchases where it can accrue a greater return rate than it can in a checking account.  The case against this setup is that you do need to be aware of your checking account balance prior to spending money to be sure that you are not going to overdraw the checking account.  It's possible that if you have multiple payments in December, including your insurance premium, Christmas presents, vehicle registration and taxes, etc, you could use a significant amount of money from checking and you would need to make a hefty transfer before finishing the month.

Now, the case for/against not including your Savings account in your bucket totals.  The case for should be pretty obvious.  Typically, the bulk of the money in your buckets would be stored/saved in a single checking account if you don't include a savings account.  Generally, if you don't run your balances to close, then you wouldn't need to concern yourself with the checking account balance before you made purchases.  You would only need to know what the bucket balance is.  Since spending less than your bucket balance guarantees you won't exceed the money you have available, and since most of the money you have available is in your checking account, it follows that you probably won't exceed your checking account balance when you make a purchase that doesn't exceed the bucket balance.  The case against this type of account is that it is difficult to use the account to save for different kinds of purchases.  This setup doesn't allow you to know what the money in Savings is for.  You would 1) need to track what the money is for separately or 2) just use the Savings account for emergencies, or 3) have a separate Savings account for each type of expense.

I actually have a Savings account that I include in my bucket totals, and a Money Market account that I do not include.  The former I use for expenses I save for throughout the year, such as Christmas gifts and vehicle registrations.  Therefore, I want to use the buckets to track the amount of money I have available for each type of expense.  This allows me earn a little bit of interest throughout the year on my money.  The latter is strictly for emergencies.  I do not need to track the type of expenses in this account, so I just use the account balance to tell me how much I have to spend on an emergency.

Other accounts that you would not include are loans that are paid off over  a period greater than a month (auto loan, home mortgage, etc) and investment accounts.  While you won't include all your accounts in your bucket system, you can still track those account balances within MoneyWell.  You just won't assign transactions in those accounts to the buckets.

Once you have decided which accounts to include in your spending plan, you're ready to finish setting up your MoneyWell document.  You're ready to determine how much money you have in your buckets.  This is total of all the accounts you have chosen to include in your bucket system (you would subtract credit card balances that you choose to include, this is because a credit card balance effectively reduces the amount of money you have on hand if you plan to pay off the balance each month).  This is an excerpt from a post I made earlier today that may help clear the water:

Here's how I set up my MoneyWell document in order to keep all this stuff straight:

1. First, I decide how much cash I have on hand to fund my spending plan.  Some people might prefer to include Savings accounts balances in this formula, others may not.  You would also include the balance on certain kinds of credit cards.  Any credit card that you use on a recurring basis each month, paying the balance each month should be included in this formula as well.  I refer to these as Spending Plan Accounts.  I might also refer to it as cash on hand/cash available.
2. Second, I decide how many other accounts I want to track in MoneyWell.  This could include additional Savings accounts, money market accounts, credit cards (accounts I don't pay off each month), auto loan balances, retirement accounts, home mortgage, etc.  These accounts affect my net worth and are of enough concern to me to track on a monthly basis, but they do not contribute to the money that I have on an on-going basis to pay for groceries and other monthly expenses.
3. I'll set up the MoneyWell document like this:

Spending Plan Accounts

---------------------------------

Other Accounts

Note:  The -------------------------- above is an account that I use as a divider between the two types of accounts that I simply provide the name of multiple dashes.

Setting up MoneyWell in this way provides a quick reminder to me how I should assign to transfers to buckets.  There are three rules to follow:

1. When transferring funds on the same side of the line, do not assign the money to a bucket on either side of the transfer
2. When a transfer crosses the line in a downward direction (from a Spending Plan Account to an Other Account), assign the withdrawal side of the transaction to an bucket.  This money is treated as though it is being "spent" by your cash available on your other other accounts
3. When a transfer crosses the line in the upward direction (from an Other Account to your Spending Plan Account), assign only the deposit side of the transfer to a bucket.  This money is being treated as income from your other accounts into your cash available.

There are two rules for spending money:

1. When spending or depositing money from/to an account that is above the line, you always assign the transaction to a bucket.
2. When spending or depositing money from/to an account that is below the line, you never assign the transaction to a bucket.  In MoneyWell, you'll need to select "make bucket optional" on the transaction so that it isn't identified as an unallocated expense.

Let me provide a few practical examples.  Here is a sample setup.

Checking Account

Credit Card 1

Savings Account 1

------------------------------------

Savings Account 2

Credit Card 2

Auto Loan

Retirement Account

Home Equity Line of Credit

Note that at all times the total amount of money in all your buckets (income and expense) should equal the amount of money in the accounts above the line (Checking Account, Credit Card 1, Savings Account 1)

Examples:

1. You buy groceries that you have accounted for in your spending plan with you Checking Account debit card.  You'll assign this transaction to a bucket (Spending Rule 1)
2. You go to movies using Credit Card 1.  You've planned for this expense in your spending plan, and you'll assign this transaction to a bucket (Spending Rule 1)
3. Your retirement account grows in value--you will not assign this deposit to a bucket.  The money you have to spend on a monthly basis has not changed, only your net worth has changed (Spending Rule 2)
4. Interest is assessed against your Home Equity Line of Credit.  You will not assign this expense to a bucket.  This has not effectively decreased the amount of money you have to spend each month (though you may need to consider making adjustments and increasing how much you allocate towards debt reduction).  Spending Rule 2
5. You make a credit card payment from Checking Account to Credit Card 1.  You should not assign either side of the transfer to a bucket (you didn't cross the line).  The amount of money that you had available to spend during the month hasn't changed.  You still have the option to make monthly expenses on your Credit Card 1 or your using your Checking Account (Transfer Rule 1)
6. Why do I have two credit cards?  One credit card you might be using and paying off each month (Credit Card 1).  The other credit card (Credit Card 2) may have a balance that you'll pay-off over time.  You'll treat this account like a loan account and use a debt reduction expense bucket to track allot payments to it.  You would not want to use Credit Card 2 anymore for your spending plan purchases.  Treat it like a loan and just pay it off, but do not charge anything on it.  When you make a payment towards Credit Card 2, you'll need to assign the withdrawal side of the transfer to a bucket.  You may need to adjust balances inside of Credit Card 2 to accurately reflect the outstanding balance after interest is applied (Transfer Rule 2)
7. You set aside money from Checking Account to Savings Account 2.  You assign the withdrawal side of the transfer to a bucket.  This effectively reduces the amount of money that you have available to spend in the month (Transfer Rule 2)
8. You make a car payment from checking.  You assign the withdrawal side of the transfer to a bucket.  You may have to additional adjusting your Auto Loan account to accurately reflect the amount by which your auto balance has decreased (Transfer Rule 2)
9. Why do I have two Savings Accounts listed above?  In order to take advantage of higher interest rates, you might have a Savings Account 1 that you use to make frequent money transfers during the month, but you consider the money in this account available for monthly expenses and you track it using your spending plan.  I use such a Savings Account for Christmas Gifts, Insurance premiums, tax vouchers.  In general, any type of expense that I need to save for multiple months, I'll set aside in a Savings account.  Since I want to track the money that I have in Savings with buckets, I'll keep it above the line.  I estimate how much money I actually spend on a monthly basis, and I transfer what ever is left to Savings Account 1.  This transfer is not assigned to a bucket.  If I make an insurance payment, I might need to transfer some money back to my Checking Account to cover the amount.  This transfer is not assigned to a bucket (Transfer Rule 1)
10. When you make an investment into your Retirement Account from Checking, you'll assign the withdrawal side of the transfer to a bucket, reducing the amount of money you have to spend (Transfer Rule 1)
11. When you retire and are ready to start paying yourself from your Retirement Account, you'll transfer money from Retirement Account to Checking, assigning the deposit side of the transfer to a bucket.  This will increase the amount of money that you have to spend (Transfer Rule 3)
12. When you increase your Home Equity Line of Credit balance in order to pay for an emergency, you'll create a transfer from your HELOC to your Checking Account.  This effectively increases the amount of money you have to spend, and you'll assign the deposit side of the transfer to a bucket (Transfer Rule 3)

I hope this helps clarify things.

Grace to you,

Blair Watkinson

[Kevin Hoctor]

Dan,

Yes, you want to use bucket assignments for all transactions in all
accounts. If you are managing your cash flow with the envelope
budgeting method, you have to treat all spending as part of your plan
so you don't cheat and plan to restrict your dining out spending to
$200 per month but slip in a dinner on your Visa and avoid tracking
that.

All your transactions except transfers should be put into buckets.
Check out our videos and FAQs for more information.

Peace,

Kevin Hoctor
No Thirst Software LLC
ke...@nothirst.com
http://nothirst.com
http://kevinhoctor.blogspot.com

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