‘Being rich’ is a funny concept. You’ll often hear the phrases – ‘When I grow up I want to be rich’ or ‘I’m going to be rich one day.’ But what does being rich actually mean? I remember back when I was a first year Electrical Apprentice, to feel rich was to have a full tank of fuel and a carton of beer, so it is all relative. Personally my definition of rich has now changed and I am sure it will again over time. So to be able to place a definition on ‘being rich’ is difficult – it is very individual, depending on your unique circumstances, environment and desires. To keep it simple and for the case of this article I will be defining rich as ‘not worrying about money’ and the ‘Three Bucket Budget’ is one of the best, simplest and easiest ways I have found to achieve this feeling.
The Importance of Feeling Rich
I believe ‘feeling rich’ is very important for every individual. We all thrive and feel most alive when we have a purpose or direction in life that we feel we are capable of making progress towards. As ‘Maslow’s Hierarchy of Needs’ or most other schools of thought in psychology, philosophy or spirituality will state your security and self-worth is one the first challenges or human characteristics needed to develop along your individual path of growth – this is also true of all other identities such as organisations, communities, states or nations etc.
For generations we have known how important it is that you feel strong and capable before you are ‘let go’ to fend and provide for yourself. In the past, for example this may have been achieved in some cultures by hunting and killing a wild animal by ones self, whereas now days this is more likely to be achieved by completing a university degree or apprenticeship. In these times being able to earn your own means is the equivalent of being able to manage yourself in the wild of the days gone by.
But, the modern day version of feeling rich also has an extra level to it that is missed by many of us – you not only need to be able to earn your worth, you also need to be able to manage your worth.
The Three Bucket Budget
Budgets usually aren’t much fun, they are usually too over complicated and time consuming to follow or too restrictive and inflexible to realistically stick with. For years I experimented with different ways to come up with a way of managing my own income and savings and for the last 5 or so years I have preferred this model. It is really simple, taking only about 10 minutes once per week to manage and I find this time also helps to give yourself a quick reminder and check-up to see if you are on track and sticking to your priorities and goals.
Once per week I calculate all of the income that has been paid into my accounts from all sources and then distribute it across the three buckets below – for which I use three separate accounts.
Bucket Number 1: Pay Yourself First
This step is an age old philosophy of wealth management. The trick here is to ensure you are always the first one to take from your latest income payments. The general rule is to decide on a percentage and stick to it (or increase it overtime) – you should try to ensure that this percentage is over 10%.
So if your total income for the week is $1200 – a minimum of $120 goes into your first bucket.
What you do with this distribution is up to you, but the idea is to compound this money so that one day it is providing you with a supplementary income or pool of capital to allocate to a home, project or cause you are passionate about. Personally I sit it in a savings account until I find an undervalued investment to buy and then reallocate the profits from these investments to projects that make good use of them.
Psychological affect that makes you feel rich: You are moving forward, growing and compounding regularly.
Bucket Number 2: Fixed Survival Costs
This is the step that is usually messy, boring and overcomplicated – so I just pool it all together. Here you work out what your fixed costs are for each week / fortnight / month – whatever frequency you are working to – ensuring you divide up all expenses for the year. This is all of the expenses that are mandatory to your survival – not eating out, shopping, holidays etc, just your fixed costs like, rent, mortgage repayments, credit card repayments (aim to pay off and then manage without having an outstanding debt), transportation, insurance, ‘base survival’ food, doctor etc.
So if your total for the year, broken down into weekly expenses are $650 – add 10% – and $715 goes into your second bucket.
The – add 10% – is not to allow you to expand on your fixed costs, it is to grow yourself a buffer, this is super important. As soon as possible you want to grow yourself a buffer in this account to allow for both unexpected expenses and unexpected losses of income. The amount you may wish to allow as a buffer depends on your personal situation – the odds of your expenses increasing and how hard it is for you to increase or replace your income. I personally prefer to have at least 3 months minimum, 6-12 months if I have extended travels or projects in the pipeline.
Psychological affect that makes you feel rich: You can sleep well each night knowing your day to day needs can be met.
Bucket Number 3: Go a Little Crazy
This bucket is for everything that is leftover. You have first paid yourself, you know that your day to day needs are going to be consistently met and so you can relax into the knowledge that you know now how much you can spend without sending yourself backwards.
So if your total income is $1200, you have saved $120 (Bucket 1), your fixed cost plus buffer are $715 (Bucket 2), you have $485 (Bucket 3) left to go a little crazy with.
Everyone is different so what you spend this on is up to you. If time with family is important to you, or camping, or eating out with friends, or saving for travel, or your sky diving licence, or hanging at the beach, or making your art – whatever, this money is to allow you the breathing space to feel like you – to feel alive and feel free. Just remember this is your limit to go crazy with – this is currently your means, until you increase your means if you choose to. So relax into this knowledge and enjoy the freedom that your current circumstances allow you without ‘dipping into’ one of the other buckets – because you will eventually have to top them back up again if you do – plus the interest that is compounding against you. In short, enjoy what you have – this in itself is a good practice and part of the psychological trick to making yourself feel rich and good about yourself – doing the opposite always remember has the opposite affect.
Psychological affect that makes you feel rich: You allow yourself breathing space and flexibility to spend some cash each distribution however you damn well please – whilst knowing you are still moving forward and within your means.
That’s it – pretty simple. You set yourself up for the future, make sure you have a roof over your head and food on your table and then you have some cash leftover to just ‘dance the way you feel’ with.
Using this method in the past I have put myself in a position to travel the world for 19 months; take time off full-time work to study and practice health; take time off full-time work to start a business; helped a friend to get themselves in a position to travel across Africa for 6 months; and helped a Financial Advising friend to model a budget for a client who was a compulsive shopper to get her finances under control without feeling too controlled.
A final tip with all of the above: Being a human can be a confusing experience, we are constantly surrounded by external incentives and desires when really internal achievements provide us with most of our happiness. Be careful what you are chasing and consider reassessing your priorities from time to time. In certain moments it may not feel like it but you will feel richer from achieving a certain level of will power over your impulsive decisions and focusing on what is truly important to you then you will from buying that $10,000 watch or handbag on credit. The trick is to feel proud of your internal achievements, even though others can not see them.
Enjoy the ride!