If you feel like you’re trying to save diligently, but your money is constantly being pulled in different directions, a savings strategy called bucketing may help you. Bucketing is a goal-oriented method in which you segment the money you are saving into separate accounts, each one earmarked for specific purposes. The system can help you to divide your savings for both short- and long-term goals.
One nice thing about bucketing is that you can pick and choose where and how you save for different goals. For retirement, your best bet may be an IRA. For a goal that’s a little closer, but that you don’t plan to meet in the next few months or longer, you may want to consider a Certificate of Deposit (CD). For shorter-term goals, you may want to keep that bucket in a more flexible high yield savings account or a money market account.
Bucketing for the Immediate Future
For each of your short-term savings goals, such as buying a home, taking a vacation, or paying for your children’s summer camp tuition, set up a different account—or “bucket.” Automatically contribute to these accounts on a biweekly or monthly basis.
Or, if you want a less-granular approach, set up buckets based on the category of the expenditures. For instance, you might put aside for a “need” expense, such as health care, a “nice-to-have” expense, such as new kitchen appliances. A separate “luxuries” account might be used to save for your ocean cruise next year.
By dividing your savings into these separate buckets, you can track your progress and prevent one goal from swallowing up money you meant to keep aside for the others.
Bucketing for Mid-Length Goals
For those goals that aren’t retirement-based, but also aren’t immediate goals, you may want to create a single bucket for each goal, then you can track your progress and ramp up your savings as you get closer. If your children were just born and you’re already thinking about college tuition, for example, setting up one account for college—and considering it part of your “need” expenses—will help you stay focused over the next 18 years.
The time horizon of your savings goal is especially important for CDs. You may want to consider opting for a longer term in exchange for a higher return, if you can wait longer to access your funds. For example, a 60-month CD will typically offer a higher rate of return than a 6- or 12-month CD.
Bucketing for the Longer Term
For distant retirement goals, a retirement account can be a good way to bucket your savings, as they often have penalties for early withdrawals.
If you have cash you want to save for your retirement and you could use a tax deduction, consider opening an IRA CD. You can sock away as much as $5,500 in pre-tax dollars each year if you are under the age of 50, and $6,500 if you are age 50 or older. If you don’t need the tax deduction, you might want to open a Roth CD, which allows you to access funds without penalty.
Filling Up Your Buckets
Whatever your main priorities are, be sure to contribute regularly to your buckets. You can start by transferring money into the account and then set up automatic contributions from your bank account. Thanks to compounding interest, the more you contribute, the faster your buckets will fill up.
Bucketing makes sense for many people—some find inspiration in being empowered to save, others love being focused on specific financial goals. But be aware that depending on how many buckets you set up, this strategy can be labor intensive, especially as you add more goals and buckets.
Seth Kaufman is a journalist and ghostwriter based in Brooklyn, New York. His work has appeared in the New York Times, The New Yorker online and many other publications.
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