Barefoot Budgeting: Understanding the Buckets

Money not seeming to stretch far enough no matter how much you earn? The Barefoot Investor strategy on putting your money into ‘buckets’ can help you get on top of your finances.

These Barefoot buckets are not a series of literal buckets you throw hard cash into, but rather an intentional set of bank accounts.

Australian author, Scott Pape, also known as the Barefoot Investor, let the world know about his buckets theory when he published his book in 2017.

The book cover of the finance book The Barefoot Investor.
Front cover of The Barefoot Investor book

The Barefoot Investor: The Only Money Guide You’ll Every Need‘ has since been declared Australia’s number one best selling book for 2017. Whilst it may be a surprise that a book about finance has come out on top, it shows that this is a topic that people want to understand better.

Having a good handle on your finances also means making choices that benefit the environment. If you understand how your money is being spent, it will empower you to make decisions that avoid waste. This naturally leads onto unshackling the throw away consumerist mindset that is so common today.

Buckets Overview

Over a meal at the pub, Scott Pape grabbed a serviette and a pen and drew a picture of money buckets for his pregnant fiancé. They both desired financial security and the serviette provided the base of a life changing financial plan.

At first glance the names of the buckets seem a little unusual, however as you get to know their purpose you’ll find that the names make sense.

The four bank accounts, plus one more, look like this: Daily Expenses, Splurge, Smile and Fire Extinguisher. We’ll get to the ‘plus one more’ later.

The Daily Expenses account holds the money for your daily living expenses such as bills, groceries and fuel.

Splurge is for personal spending typically in the want category, not the need department.

The bank account called Smile is for your savings goal. It’s whatever makes you smile.

Fire Extinguisher may sound like a very unusual name, however, you’ll find it fits the purpose well. Fire Extinguisher is where you stash your money to put out small financial fires. It covers things such as the cost of minor repairs to your car.

How Much Money in Each Bucket?

Each payday, 100% of your take home pay gets divided between the four accounts. If you get paid a regular amount, it’s easy to set up automatic transfers from your pay account to the other accounts.

If your pay amount is different each payday, you’ll need to manually calculate the amount to transfer, keeping in mind the cost of your Daily Expenses. It’s easy to do as there are only four accounts.

For two working people, add up the total for both wages and then allocate the money between the accounts.

The recommended percentages into each account look like this:

  • 60% Daily Expenses
  • 10% Splurge
  • 10% Smile
  • 20% Fire Extinguisher

Calculating Percentages

For example, you get paid $900 into your bank account. The money your pay goes into is typically the Daily Expenses account.

First, you calculate 60% of $900. On a calculator you type 900 x 60%. If you are using a calculator on a smart phone and don’t see the percentage sign, try tilting your phone from portrait to landscape to activate the scientific calculator.

900 x 60% = 540

Now we know what 60% of 900 is, we’ll leave $540 in the Daily Expenses account for bills, groceries and fuel.

Next, we calculate how much money to put into the Splurge and Smile accounts. Both accounts get 10% each.

900 x 10% = $90.

So that’s $90 into the Splurge account for your wants.

And $90 into your Smile account for your savings goal.

The Fire Extinguisher account gets 20%.

900 x 20% = $180

You transfer $180 into your Fire Extinguisher account to put out small financial fires.

Lastly, double check your figures are correct by adding up the amount going into each account.

540 + 90 + 90 + 180 = 900

Yippee, our amounts balanced and your money has been allocated successfully to each account.

A visual representation of the Barefoot bucket system of finance.
Visual diagram of the buckets

Daily Expenses Bucket

This is the most used account as it’s how you pay your bills.

Typical expenses paid from this account are mortgage and rates payments or rent payments; groceries; fuel and car registration; electricity, gas, phone and water bills; insurances; credit card payments; personal loans such as for a car; school fees; medication etc.

If you are paid weekly, it’s easy to figure out how much money is needed to pay weekly bills such as rent.

For bills with a longer gap between payments, it’s a good idea to figure out what the weekly amount is and then keep that money aside each week for when the bill is due.

None of your larger bills with a regular amount due on a regular date should take you by surprise or cause bill stress if you have planned for them.

For example, imagine your car registration costs $600. We take that annual $600 figure and divide it by the 52 weeks of the year.

600 ÷ 52 = 11.53

So each week you put $11.53 aside for car registration, in another bank account if that makes it easier. If you get paid fortnightly, calculate 600 ÷ 26. If you get paid monthly, calculate 600 ÷ 12.

Now do this for all your larger bills such as electricity, gas, water, rates, insurances and school fees.

Figure out the weekly cost of all your regular known bills including groceries and fuel.

If you get paid fortnightly, figure the fortnightly cost of all your regular known bills.

This total weekly or fortnightly amount of all your regular known bills ideally will come to 60% of your income.

Daily Expenses Over 60%

Some people have found that after the first time they sit down and budget for their bills that their Daily Expenses are way above 60% of their income.

If this has happened to you, have a serious look at your budget and see where you can cut costs.

Here is a list of the ways that we were able to reduce our Daily Expenses:

  • Have you renegotiated your electricity and gas bill each year to get the best deal?
  • Do you look online to compare insurance companies?
  • Do you have the cheapest phone plan for your circumstances?
  • Can you walk or bike ride instead of taking the car?
  • Have you considered buying clothes at opportunity shops rather than buying them new?
  • Are you spending too much money at cafes, restaurants and pubs?
  • Do you really need subscriptions and memberships to Netflix, magazines and expensive gyms?
  • Are you buying too many groceries and throwing food out every week?
  • Can you really afford any extra activities you are paying for?

If after doing everything you can to reduce your Daily Expenses and your percentage is still too high, you’ll need to re-adjust the amount of money going into each bucket.

For example, your Daily Expenses are at 80% and you are left with 20% for the other three buckets. You will need to figure out how to split the remaining 20%.

If you have personal debt such as a credit card or a car loan, I suggest you split the money in favour of the Fire Extinguisher. Always pay the debt with the highest interest rate first as this is the debt that is costing you the most money.

Figure out what works best for your situation. And keep hammering down those Daily Expenses until you get to 60%.

Daily Expenses Under 60%

Lucky you!

Funnel the extra money into paying off debt. If you don’t have any debt, send it your Smile account to save up for the things that really matter to you.

Splurge Bucket

This is the money that pays for your wants. Things like eating out at a cafe or restaurant, going to the pub, buying tickets to an event, buying a magazine or book (libraries have these for free), splashing out on new shoes you don’t really need – you get the idea.

Splurge money is 10% for a single person, or 5% each for a couple.

It’s important to note that when your Splurge runs out of money, that’s it, there’s no more Splurge until next payday.

Do not transfer money from your other accounts into your Splurge to top it up. If you take extra money out of your Daily Expenses you won’t have enough left for your bills. If you take from your Smile then your savings goal won’t go as planned. If you take from your Fire Extinguisher and something happens such as you suddenly have to go to the dentist, you’ll be in a conundrum.

Smile Bucket

What savings goal do you have that makes you Smile?

Perhaps it’s saving for a house deposit, or maybe an international holiday? We all have different savings goals. Have a think about what you most would like to save for.

What an amazing thought it is to know you have the ability save up for something that makes you Smile.

It’s time to put your dreams into reality.

By putting 10% of your income directly into a Smile account, you’ll be surprised at how quickly you can reach your goal.

Previously, we had never saved for a holiday but since we’ve been following the Barefoot Buckets – we had a fully paid family holiday to a snow resort for a week. This filled us with so much excitement and anticipation and it’s all thanks to the Barefoot Buckets.

Fire Extinguisher Bucket

With money in your Fire Extinguisher, you won’t need to reach for your credit card whenever something breaks or something goes wrong. In fact, you won’t need a credit card at all.

Everything That’s Wrong With Credit Cards

If you do have credit card debit, your Fire Extinguisher will help you. First, pay the minimum payment through your Daily Expenses and then use your Fire Extinguisher to top up those payments to pay off your debt faster.

It’s the same scenario with personal loans and mortgages. Focus on paying the debt with the highest interest rate first.

The Fire Extinguisher also comes in handy when your car needs repairing, or you have to go to the dentist unexpectedly, or your fridge suddenly stops working. In fact, it’s good for any unexpected financial costs. It’s purpose is to put out financial fires.

We’ve had to rely on our Fire Extinguisher many times. When we returned from a hospital stay 300 km from home, we discovered our washing machine had stopped working. We tried to get it fixed but repairing it was going to cost as much as buying a new appliance. Thanks to having that money stashed away, getting a new washing machine was as easy as pressing ‘buy’ when online shopping.

Plus One More: Mojo

Earlier, I wrote about an extra account that would be covered later and here it is – the Mojo bucket.

Just as the Fire Extinguisher puts out small financial fires, the Mojo account deals with much larger unexpected financial problems.

We are talking situations such as suddenly losing your job, getting very sick, an overseas family emergency, your car having a major mechanical problem or your house getting flooded.

Mojo gives you a sense of security that no matter what happens, you will be okay. Having this account means you will never need to worry about money again.

The Barefoot Investor recommends you start with a minimum of $2000 and when he says for you to sell items at home or in the shed to come up with this amount, he’s not joking.

Once you have your minimum safety net, it’s time to keep building up this amount until you have at least three months worth of living expenses. Doing so will give your life Mojo.

Where To From Here?

There is so much more to the Barefoot Investor than budgeting and using accounts with unusual names.

If you would like to delve deeper, I highly recommend buying or borrowing Scott Pape’s book and working your way through the nine steps.

This blog post covers step two of the book. Check out this tongue-on-cheek YouTube video to get an idea of what other financial advice is covered.

The Barefoot Investor Cult

To find out about your financial literacy level have a look at What’s Your Financial Literacy Age.

If you have children, you could look into Kids Pocket Money: Barefoot Style or the Barefoot Investor For Families book.

Disclaimer: I am not a professional financial advisor. This blog post is a general overview and includes information from our own research and experiences.

Which one of the Barefoot Buckets would benefit you the most and why?

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