The Three Buckets - An Easy Way to Budget your Money and Life
There are three basic buckets when it comes to making decisions about our money and life. What we decide to do with every dollar falls into three main categories.
So looking at how we spend our time and money and deciding which buckets to focus on is the easiest way to budget our time and money. It comes down to identifying what we do with every dollar and every minute of the day. The 3 Bucket principle is what I live by everyday and it's brought me great wealth and happiness.
"We often have to sacrifice in the short term to benefit in the long term. "
Bucket 1: Basic Necessities
These are the fixed costs in our budget that no matter how much we trim down our spending, we can't live without it. This includes everything we spend time and money on that keeps us alive. For example, food on the table, shelter over our head and any other physiological needs for human survival.
Bucket 2: Short Term Desires
This is what people do once their basic needs are met. For most people this is where the majority of their time and money is allocated. And that's okay. Short term desires are an important piece of our lives, but real wealth is generated from looking beyond our short term needs and investing in the things that bring us long term wealth.
It can be hard to move beyond this bucket. We have pressure to want new 'things'. New cars, bigger houses - it's the American way. It only becomes a problem when we focus so much on these things that you aren't left with anything to put in the final bucket. This is where the rubber meets the road and where most of our crucial financial decisions are made. Focusing on improving how we spend our time and money on our short terms desires is the best way to make huge changes in our life.
Bucket 3: Personal Wellness
Our personal wellness bucket is where our long term wealth and happiness is generated. We know short term desires will make us happy in the short term, maybe even for a year or so, but we have to budget time and money for this bucket. This is where you focus on long term improvement of yourself and how you'll build long term wealth.
Fortunately this bucket can be easy to fill. It's simply investing in things that matter the most. It's saving your money and investing, working out, meditating, spending time with friends, playing with your kids, or participating in a favorite hobby. We often have to sacrifice in the short term to benefit in the long term. When we focus on allocating more of our resources to this part of our life, it may not always feel good today, but you will always feel happier tomorrow.
Putting it together:
All this seems pretty basic, because it is. But it can also be really hard. Necessities can seem like a big part of our life, but often we decide what our own necessities are and its human nature to expand our idea of what are basic needs are. For example, Netflix, in all its glory...and it is glorious, is not a basic need.
We have to take a deep look into what our basic needs truly are. In America, most of us can fulfill our basic needs pretty easily, even for someone who is considered at the poverty level. Our goal should be to take time and resources away from our basic needs, wants, and desires and convert them into wealth creation. For example, skip that Starbucks double shot latte or daily coke machine ritual and instead toss that money into savings every month. It's surprising how fast those little "feel good" purchases can add up and even more fascinating how quickly savings or investments can grow when those little purchases are minimized. I have found this is the simplest way to make the best decisions on a daily basis for my long term happiness.
So does this mean we all have to live like celibate monks in order to build long term wealth and happiness? Heck no! Spending time and money on short term desires is an important part of our lives. In fact, filling all three of these buckets is extremely important in our life, but it is focusing on our personal wellness bucket that will change your life.
How do we apply this to our life? One way my wife and I apply this to our daily life is by saving and investing 50% of our income. 50% of our income goes into savings and investments every month before we see it or touch it. For us, this removes the temptation out of spending that money. 50% may be an aggressive number for most people and that's okay, but continue to try and grow that number. We didn't start by saving 50% of our income, we slowly worked to get there - shaping our daily life, routine, and habits until we learned to live off less. Whether its saving a extra dollar today, getting in a working out, or eating better for even one meal - find what matters most to you and you'll be one step closer to building true wealth and happiness.