My Simple Personal Finance System

Money — a piece of paper with no real value making the world work day and night to achieve it. Making people hope that one fine day they will have enough paper in their bank to never worry about it again, only to eventually realize that it is never enough.

I always wondered how the whole world is still functioning by trusting a piece of paper that is backed by nothing. But then I realized that it is not that paper the people trust, it is one another. I trust that my employer will value my work and accordingly pay me the pieces of paper which I trust the cafe barista will accept and in return give me a cappuccino. The barista will then collect many pieces of paper and trust their supplier to provide them with coffee beans, milk, sugar and other commodities in exchange.

Of course, most of the world is replacing these pieces of paper with simple numbers; numbers on some highly secured bank servers. I know all of this is over-simplified but the concept of money remains fascinating.

Money is crucial to survival. The money in bank accounts and wallets empowers people. It gives dreams, aspirations and freedom to live life. It gives a sense of security in darker times and sweet happiness on sunny days. Managing personal finance becomes consequential to enjoying this luxury. Yes, in the world we live in today, I would call this a luxury.

The more complicated one’s personal finance system is, the more difficult it is to get a clear picture of how well they are doing in terms of money.

Neither am I a millionaire nor am I a financial adviser. I will just be covering how I manage my money and hope it helps you in managing yours.

I follow a very simple and logical system I call the Buckets System.

The Buckets System

The system is built with 6 buckets of money. Each bucket of money represents a bank account. I live in Australia and here every bank allows an account holder to open multiple Savings Accounts linked to 1 transaction account. I believe it is the same in most other countries as well.

The focus of this system is simplicity and flexibility. Each bucket has a purpose and is logically set up. You get a clear picture of where your money is and its purpose. All money is accounted for. The buckets are spread out categorically which you are in complete control of. Hence, you can add or remove buckets. At any given point in time, you know much money has been spent and how much is remaining.

This system is divided into two parts — buckets and flows.

Let’s start filling the buckets and understand their purpose.

Bucket 1: Hub in Bank 1

This is the bucket that is exposed to the world to deal with you. This is a transaction account with incomes from salaries and side gigs coming here. It is the account number you give your friends to transfer you the money they owe you. You will have a linked debit card to make payments.

Bucket 2: Fixed in Bank 1

This is a savings account holding all your fixed monthly expenses. This is your utility bills, phone bills, monthly insurance premiums, phone bills and apps and software subscriptions. Any expenses that you are sure of.

Bucket 3: Splurge in Bank 1

This savings account holds the money for you to splurge on the things you love, such as that beach holiday your partner has been nagging you about, the latest MacBook your kid has been requesting for a few months and the coolest drone you have been dreaming about.

Bucket 4: Expenses in Bank 1

This savings account holds the money for the rest of your monthly expenses, for example, eating out, movie tickets, car parking, fuel, etc. This is the money you know will be spent during the month but just not sure how much and on what exactly.

Bucket 5: Mortgage in Bank 1 or Bank 2

This is an account with the bank you have taken your mortgage from. It can be either the same bank as the previous buckets or another which offers you a better deal.

Bucket 6: Emergency in Bank 3

This Savings account, with no exceptions, has to be separate from the previous bank accounts. This account should only hold money for rainy days. Please don’t be sneaky and try to access money to cover the gap amount for the holiday trip. Remember, this money is for getting you back on track at the low points in life.

Now, let’s talk about the flows:

Flow 1: Hub to Investments

Every month as soon as I get my salary credited into the Hub account, 20% is transferred to my investment platform. Currently, I am using Stake to build my investment portfolio. One thing I realized very late in life is that investing money safely, regularly and as early as possible is essential for security in the later phase of life. The money sitting in your bank accounts can never beat the rate of inflation. I will write more about it in my upcoming articles.

Flow 2: Hub to Bank 1

40% of my salary is transferred to my bank accounts which hold Buckets 2, 3, and 4. I need to make sure that I only use 40% of my income on monthly expenditures.

Flow 3: Hub to Bank 2

35% of my salary goes toward paying my home mortgage. This is a hard-line transaction as I don’t want to fall back on any of my mortgage payments. It includes the mortgage repayment amount plus some extra repayment amount. This keeps my credit score very high, helps me pay more toward the principal amount I have borrowed and helps in clearing the mortgage sooner.

Flow 4: Hub to Bank 3

5% of the salary goes to the Emergency account every month. This gives me peace of mind.

Some important points

Before you set up your buckets, please make sure to create a complete list of all your expenses. This list has to be honest and detailed. If you make unrealistic goals/assumptions, you will never be able to track your money.

• I use a credit card to make monthly payments. I use it like a debit card, meaning I clear the balance every single night for the money I spent during the day. I clear the balance from the appropriate buckets (which are Buckets 2, 3 and 4). I use credit cards to earn cash back and get international travel insurance and security protection benefits.
• I have set up the flows as automatic transactions in my Banking applications. Once my salary is credited to my Hub account, it automatically gets distributed to the different buckets based on the set percentages.
• Every time the income increases, the surplus money gets distributed across Investments, Splurge and Mortgage buckets. Let’s say my monthly salary was $10,000 and has increased to $12,000. From this newly added $2000 to my pocket, I would invest $500 (25%), send $500 (25%) to the Splurge bucket and the rest $1000 (50%) would go toward making additional Mortgage payments. You have the flexibility to change this distribution at any given time.
• Add or remove buckets/accounts and update your flows depending on your situation but always keep an emergency account.

Finally, it’s time to take control of your hard-earned pieces of paper and put them to work toward your happiness, satisfaction and a bright future.

Please consult with your financial adviser before taking any major money steps.