Budgeting in Buckets: What, Why and How?

by Creating Change Mag
Budgeting in Buckets: What, Why and How?

We’re going to venture a guess that you wanted to start a business in order to maximize your earning potential. At the same time, you probably don’t need us to tell you that one of the most common reasons why businesses fail is improper management of cash flow. While every business is different, one common method for managing revenue and expenses is budget bucketing.

In this article, you’ll learn:

  1. What it means to budget in buckets.
  2. How this approach might benefit you as an entrepreneur.
  3. How to get started with bucket budgeting.

Let’s go!

Wait, what is bucket budgeting?

Budget bucketing might sound self-explanatory. It means that you organize your expenses into different categories (read: “buckets”) to help you better plan your finances, pay them on time, and ideally, have money left over. This is a more modern version of envelope budgeting, where you literally stash your cash into envelopes designated for various types of expenses. Anything left over at the end of the month can be saved or spent on extras.

There are all sorts of ways to bucket your finances, but common categories include:

  • Taxes
  • Revenue
  • Rent
  • Software and tools
  • Payroll
  • Food and entertainment

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What are the benefits of budgeting in buckets?

Understandably, you might think it’s best to keep all of your business’s money in one bucket to pull from, but there are a few reasons why you might consider bucket budgeting instead.

1. It tells you where your business is costing you the most money

Bucket budgeting can be very revealing because it almost forces you to acknowledge the most expensive parts of your business. And, you might find that these expenses don’t add up.

For instance, let’s say that one of your buckets is software and tools. You discover that these expenses add up to $1,000 a month, and yet you only use these tools roughly once a week. Is it worth the cost? Are you getting a return on that $1,000? Maybe, maybe not. But without bucket budgeting, you have no way of finding out.

Thus, bucket budgeting is a simple way to save money for your business!

2. Bucket budgeting makes tax season much easier

No one likes dealing with taxes, but as an entrepreneur (heck, as a human), it’s inevitable. The more organized you are as a business owner, the easier tax season is going to be. Budgeting in buckets can help with that.

As an example, let’s talk about your business’s expenses — which you might be able to deduct to help lower your taxable income. If you have a home office, then perhaps one of your buckets is home office expenses. In this bucket, you have expenses like the rent/mortgage you pay based on the square footage of your home office, the WiFi, phone bill and so on.

As Tax Day approaches, you’ll be more easily able to determine what you spent and what you can deduct from your home office expenses thanks to that bucket.

3. Buckets can prevent excessive spending

Carelessly swiping your credit card can really do damage to your business bank account. Bucket budgeting can help! “I’m going to tighten up the meals and entertainment budget” is much more arbitrary — and thus, likely to fail  — than setting aside $300 a month for that specific purpose.

When you can make your budget(s) less abstract and more concrete, you can maximize your business’s savings.

Pro tip: Once a month, sit down and compare your budget to your actual expenses. If you find that you’re regularly setting aside $500 in a bucket but only spending $150, it’s probably safe to allocate some of that excess money to something else.

How to get started with bucket budgeting

There’s more than one way to go about this, but this is the approach that made budgeting in buckets really easy for me and my business. (For context, I run a small content agency and have a team of four part-time writers.)

  1. I went to my bank account online and went through all of the transactions from the last 90 days. This gave me more visibility into the types of expenses I regularly have, instead of having to guess. I also caught some expenses that were sneaking up on me that I needed to get a handle on — more on that in a minute!
  2. As I went down my transactions, I started putting each of these expenses into their own buckets. Business-related meals and Starbucks runs went under Meals. Uber rides to clients’ offices went under Transporation. My social media management subscription, payroll software and bookkeeping system went under Tools and Software.
  3. Once I had a better idea of what each bucket was costing me each month, I went through all of them with a fine-toothed comb. This approach was very revealing. For instance, I learned that I was spending about $600 a month on software and didn’t even realize it. (That number used to be under $100!) So, I went through all of my subscriptions and was able to eliminate a few that I hardly used or at least downgrade my subscription, ultimately saving me money every month.

I still audit my buckets once a quarter but on a more regular basis, I’m simply making sure I stay under budget and pay all my bills on time.

What kind of bank account do you need?

No two entrepreneurs (or businesses) are exactly alike, and if your business is just getting started, you might actually be a sole proprietor on paper and thus use your personal bank account.

I’m not here to tell you what kind of bank account you need. But I will say that if you get a separate business checking account, it’ll likely come with a number of features that’ll help you manage your business’s finances smarter. For example, depending on what banking platform you use, you might get access to several checking accounts — i.e., buckets — that you can use to organize your finances. (There are other benefits too, like higher limits on the number of transactions you can have and the money that you can move into and out of your account, but that’s beyond the scope of this article!)

Using accounting software is also an option. For example, I use Xero for my small business. Within Xero, I reconcile all of my transactions based on the category they belong in.

Some business owners even use a good old-fashioned spreadsheet. You can absolutely take this approach! Just know that it’s more manual and leaves more room for human error.

Is bucket budgeting right for you?

I understand that changing up your budgeting style can be intimidating. Sometimes, we don’t want to have more visibility into our finances because we’re scared of what we might find. But take it from this gal, who used to be very nervous about anything having to do with money: If you can force yourself to face that fear and become friends with your business’s finances, you can use this knowledge as a tool to reach the next level of success.

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