So here we are, on our 3rd post/video about Budgeting. I hope you’ve been enjoying them so far. Today’s topic is a follow up to the concept of the Three Bucket Budget:
Bucket 1: Monthly, Quarterly and Annual Expenses (MQA)
Bucket 2: Credit Card Purchases
Bucket 3: Cash Purchases
If you’re following along with us, by now you’ve identified your expenses and sorted them out into their respective buckets. Now it’s time for the fun part-FUNDING your buckets (or filling them up)! Before you can start putting your money into the right bucket, you have to determine how much money you really have to work with. Two key terms here are “gross” and “net”. For our purposes, “gross” income is our salary, while “net” income is the money we have to work with AFTER we’ve set aside money for taxes, retirement and our kids’ college tuition.
Once you have your “net” income, it’s time to fill the buckets. Michael’s advice, and how we set up our allocations, is a simple percentage:
60% of net goes into the MQA Bucket
20% of net goes into the Credit Card Bucket
20% of net goes into the Cash Bucket
One caveat to keep in mind for the MQA Bucket is to make sure that your housing expenses (mortgage/rent payment, taxes, insurance and association dues) do NOT make up more than 30% of your MQA line items. Professionals refer to this as P-I-T-I-A, or:
In simpler terms, your total housing expenses should NEVER exceed 18% of your net income, although many banks and other lenders will tell you otherwise.
One question we often get is what to do if you can’t fully fund all three buckets. What we do is to start cutting as much as we can from Buckets 2 and 3, and if we’re still short, then start looking at discretionary items in Bucket #1. For us, we’ve always lived not just within our means, but below them, in order to get our budget in line with that 60-20-20 breakdown. It won’t happen overnight, and it doesn’t mean it’s for everyone, but it’s worked really well for us and we wanted to share with you all how we do things. If you want to hear us talk more in depth about how suggestions for how we got our budget in line and what P-I-T-I-A really is, watch the video here.
We’re planning on doing at least two more videos (and blog posts) in the Budgeting Series, including one on how we invest and save for big ticket items. For our last budget video, Michael and I would really like to answer your specific questions, so if you have any, please list them in the comments section and Michael (or I) will answer them in an upcoming video in September.