For many of our clients, they lived very frugally throughout law school and upon entering the work force have overcompensated with excessive spending. These individuals typically spend money and whatever is left over at the end of the month is put into savings. This is called passive savings, and I think most of us would agree that life tends to find great ways to eat up money so there usually isn’t enough left over to stay on track with your savings goals. To accommodate your goals while still providing a healthy balance, we recommend the “3 Bucket Approach.”
Bucket #1: The first account is your “Fixed” account. This is where your direct deposit goes and it is then used to pay your fixed monthly expenses, such as mortgage, student loan payments, utilities, etc.
Bucket #2: The second account is the “Dynamic” account. This is used to pay for your variable expenses and can be considered a weekly allowance, one account per person. You break down your spending into weekly segments, rather than monthly.
For example: If you buy the groceries for the family; you would add that in with your shopping, gas, etc. If the total for one month is $600, then each week you would get $150 automatically deposited into your discretionary account. Since these expenses vary, how you actually spend the money is your choice but this approach helps to eliminate guilt associated with spending and still makes sure that your bills and savings are top priorities.
Bucket #3: The third account is the “Savings” account. From your “Fixed” account you would set up an automatic monthly transfer into this account. Doing this automatically helps you to be proactive and consistent in your savings.
Written by Kristin R. Brandli, Financial Advisor
North Star Resource Group
1257255/ DOFU 8-2015