Do you want to pay off debt? Save for future expenses? Make strides toward your retirement goals? Budgeting By Buckets, my Profit First method for personal finance, has helped me to accomplish so many of my money goals. By using buckets for spending and creating a financial power hour routine each paycheck, you can not only make a plan – you can live the plan, too!
S4E7 – Biblical Stewardship: What Should a Christian’s Money Goals Be? – A More Beautiful Life Collective Podcast
- S4E7 – Biblical Stewardship: What Should a Christian’s Money Goals Be?
- S4E6 – What Does the Bible Say About Money? | 20+ Scriptures on Finances & Biblical Stewardship
- S4E5 – What Do Jerusalem, Athens & Rome Have to Do With Your Faith?
- S4E4 – You Don't Have to Agree With Them to Learn From Them: Why You Should Study Church History
- S4E3 – Bible Alone? Can We Really Just Follow the Bible?
Welcome to A More Beautiful Life Collective. I’m Cayce Fletcher, and I’m here to walk hand-in-hand with you as we grow in grace, build with purpose, and live beautifully. We’ve been talking about money, finances, and budgeting on the blog recently.
So far, we’ve talked about:
- How Scripture approaches finances
- How we should be good stewards of our finances
- How to get your finances in order
And, today, we are going to get super practical with an extremely flexible way to budget your way out of debt and toward your money goals.
Numbers Numbers Everywhere
Let me just paint the picture for you:
My head was swimming with numbers. As I tallied up our expenses, debt payments, bills, and all the projects neglected around the house. I worked and reworked our budget, thinking: If I could just find space somewhere, then everything would be okay!
I wrote and rewrote what I thought we needed. The issue was the numbers just wouldn’t make sense. Honestly, they couldn’t. We were in the fledgling days of the business. We didn’t have a consistent stream of income. (Honestly, some weeks there was simply no income.)
How can you make a budget when there’s no money to budget?
I wanted some amount of control, and so I wrote and rewrote the budget. But no amount of brainstorming would get the result that I wanted: to feel safe and secure.
I wanted to be a good steward of our finances. I wanted to be able to give generously. To steward our home well. To create a haven for our kids – and give them access to all the things that I thought made up a thriving life.
But what my current reality was just didn’t match up with my desires.
Instead of a comfortable, cozy atmosphere with everything I wanted, I was just left with pages and pages of numbers scrawled out – the sums never adding up right.
Budgeting When It’s Hard
In the last episode, we talked about a road map to get your budget in order. You need to do the work of assessing where you are at and where you want to be. Then, by adding up your expenses and making a plan to pay down debt, you can start making baby steps toward your goals.
For some, this process works without a hitch once they set their minds to it. Maybe you don’t have much debt, so after a few months, you’ve got what you need to clean up, and you’re off to the races.
Or maybe your income is already high. When you rein in your spending, you can easily live within your means and save some on the side.
If that’s the case, the method that I’m going to mention probably won’t be of much use to you. What I found is that zero-based budgeting gave me an excellent starting point, but I could never stick with it consistently over the long haul.
Just like counting calories is helpful in the initial push of weight loss, tracking your spending manually (or with an app) can be very helpful in plugging up the holes in your budget. But it was never enough to really move me forward in my money goals.
I tried cash envelopes, but consistently getting to the bank just did not happen. That, coupled with shopping online for most household staples, just made it not work.
I spent hours writing down each expense and highlighting it. This helped me cancel some unwanted subscriptions, but it didn’t get my money working in the direction I wanted it to.
I still often felt like there was too much month at the end of the money, and I often felt like I never could move forward on my debt payoff plan.
What method finally got me moving in the right direction? Budgeting by buckets.
What is the Profit First Method?
At the same time as trying to get my personal finances in order, I was also working on our business finances. A book that came highly recommended was Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. When I opened up the book, I was shocked at just how much it spoke to our current situation, and I took pages and pages of notes on how to implement it in our lives.
The premise is simple: You will use whatever money you have. So, the way to stop spending all your money is to limit the money you have access to.
In a business setting, this looks like:
- Creating multiple bank accounts
- Determining how much money should be transferred into those accounts
- Not ‘borrowing’ from accounts to make ends meet.
Ta-da: It’s the simplest, most flexible budgeting method I’ve used. And it actually works.
Why should you use the Profit First Method?
Why would you go through all that account opening and money transferring just to have your money spread out in different accounts? It’s still the same amount, right? Wrong!
Just like how not buying snack foods magically helps you eat fewer snacks, organizing your money in this way will magically help you stick to a budget.
By not having access to all your money in one account, you force yourself to follow what you’ve said your budget is.
And because of the quick view on online bank accounts, you always know exactly how much money is left in each part of your budget.
This method is so beneficial because:
- It’s easy to use.
- It’s clear.
- It forces you to follow it.
- It helps you know where your money is going.
And other than the time it takes to make the original transfers, you don’t have to spend time tracking every expense. You can just take a quick look at the accounts, and you know exactly what you have spent.
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Who should use the Profit First Method?
Mike Michalowicz originally wrote Profit First for people like him: entrepreneurs starting businesses. If you’ve ever owned a business, you know that your income fluctuates. This can make budgeting difficult. When you are making good money, your expenses rise to meet it. Then, when things slow down, you are left with too much overhead and a headache.
By budgeting by percentages, you are ensuring that your operating expenses never balloon so big that you – the owner – cannot take a paycheck.
If you are a small business owner, this book is definitely worth the read (along with all the others he’s written).
But even if you are not, the Profit First Method is perfect for:
- Numbers-Averse People
- Moms and people with families
- People with ADHD
- People with side hustles and multiple streams of incomes
- People with varying paychecks
- People who struggle to save and/or pay down debt
The Nitty-Gritty Details of the Profit First Method
So, now you know why you should use the Profit First Method; let’s talk about how. In the business world, this is how the Profit First Method works:
Step 1. Open your bank accounts.
You’ll need:
- An Income Account
- Profit Account
- Taxes Account
- A Materials and/or Operating Expenses Account
- Payroll Account
- Owner’s Compensation Account
- Potentially: Lease/Debt Accounts
- And any other accounts for regular expenses
Later on, you can open two High Yield Savings Accounts (HYSA) for your long-term profit and tax accounts. But that is only when those checking accounts grow larger than what would make sense to keep liquid (between roughly $1000–$5000).
Step 2. Determine your percentages.
Then, you’ll need to figure out your percentages. Mike Michalowicz gives recommendations based on your annual revenue here.
The goal with your percentages is to start adding money to your profit (and tax) accounts right away, with the goal of getting your percentages to roughly 5-10% for your profit accounts and 15% for your tax accounts.
Note: You have to be willing to slash expenses if you notice that one part of your percentages is out of whack. If your operating expenses are 75% of your revenue, something’s probably off.
Step 3. Regularly do your allocations.
Michalowicz recommends distributing money twice a month on specific days. I generally do my allocations weekly during my financial power hour. The goal is to deal with your money then. So, transfer money, pay bills, and run payroll during this time. In the meantime, all your income goes (and sits) in your income account.
Step 4. Distribute your profits quarterly.
On the first day of every quarter, you can distribute from your profit account. Michalowicz recommends distributing half. Then, out of that half, you can either (1) use the money to pay down debt or (2) do something fun if you have no debt!
Eventually, you can begin distributing a portion of that Profit account to your HYSA to grow over the years. Over time, you will build up a nice little savings account that also operates as a rainy day fund.
Budgeting By Buckets: The Profit First Method for Personal Finance
Now, you may be wondering, okay, this is great, but I don’t own my own business. How does this apply to me?
The truth is, you can use these same principles to get similar results with your personal finances.
Since starting the Profit First method, I’ve
- Paid off almost $10,000 in debt
- Cash-flowed several larger expenses
- Built my credit score
- All while having the money for living everyday life
You can experience this change too. Here’s how to apply the Profit First Method to your personal finances. We budget by buckets.
Step 1. Know your finances.
First, you need to take a step back and start at step 1 in the budgeting process we talked about in the last post—Budgeting 101. You need to know where your money is currently going to know which accounts to open up and begin to determine your percentages.
Everyone’s finances are different. Everyone’s money goals are different. You need to assess your current situation, make some goals, and develop an understanding of where your money is currently going.
But don’t get bogged down there. If you feel like you will press pause and never think about budgeting again, just skip this step and head to number 2—you can always come back later.
Step 2. Open your bank accounts.
Just like the Profit First method starts with bank accounts, budgeting by buckets also starts with bank accounts.
The bank accounts that I use are:
- Recurring Expenses: This is everything that recurs each month, including bills and subscriptions.
- Day-to-Day: This is anything variable, including gas, groceries, and regular activities and shopping. You can also include eating out and other discretionary expenses here.
- Debt: If you are trying to pay down debt quickly, open up a separate account for just these expenses. This will help when following the snowball or avalanche method.
- Giving: Tithing can be a difficult habit to start if you’ve been living paycheck to paycheck. Creating a ‘giving’ account can help you feel like that money is dedicated to giving away (and not yours). I use this for our regular tithe and other charitable donations (like our church conference, school events, and Compassion child). Having an account like this will make it easier to say yes when you are asked to give financially to someone or some cause.
- Emergency Fund (Savings): If you are following the Budgeting 101 plan, you should have an emergency fund of at least $1000 that is liquid and readily available.
- Sinking Fund: I have a set sinking fund account that is just savings that I’m rolling over to larger regular expenses. This account is regularly used for clothing, car expenses, etc.
- Fun: Don’t forget to save for fun! By setting aside a few dollars each week, you can pay for nice anniversary dinners, camping trips, and vacations.
You may need other unique accounts based on your situation. This list can get you started as you brainstorm what categories you may need.
Step 3. Create Sinking Funds
Now, you’ll notice that the list of accounts doesn’t necessarily include big expenses. I homeschool, and for us, that does mean a big expense a few times a year. (We use Memoria Press and do the cottage school, so it’s not cheap! But it’s worth it.)
This is a perfect example of what you would need a sinking fund for. This is money you set aside each distribution so that when the expense rolls around, you don’t rely on a loan (aka credit card) to pay it.
Some examples of sinking funds could be:
- Business expenses (for example, my blog hosting expenses)
- Car expenses
- Schooling
- Taxes
- Vacation
- Christmas
Yes, taxes are no fun. But, for the most part, these expenses really can be things you look forward to doing. They are worth saving towards now. Because you don’t want to get back from an amazing trip and Disney only to spend the next year (or 3) paying it off on your credit card. If you cash-flow that expense, you can go, enjoy, and then enjoy it again when you come home and not have to worry about paying it off. (You can still put your trip on your card to get the points—just pay it off with what is in your bank account when you get back!)
Since starting, I’ve also opened a HYSA with Ally Bank. They offer the option to distribute the savings into ‘buckets’ that you can then transfer money out of. For instance, I needed to save up for my son’s school payment.
Each week, I can transfer a little into the HYSA. Then, when the tuition is due, I use that account to pay for it. This makes a very simple, streamlined process for Sinking Funds. (I use Zelle to move money back and forth from Ally. I also have an Ally checking account.)
Step 4. Determine your distributions.
In Profit First, Michalowicz gives ballpark figures for what your distributions should be. This is an eye-opener for many—especially when the owner realizes he should be paying himself 30% and really he’s in the negatives when it comes to owner’s compensation.
For personal finances, there are a number of ranges for percentages:
- 50 Needs/30 Savings/20 Wants
- 60 Needs/20 Savings/20 Wants
- 70 Needs/20 Savings/10 Giving
- 80 Needs/20 Savings
Ultimately, all of these percentage methods really only work if they are done in the context of your current situation.
For us, we do the following for our percentages:
- Recurring Expenses – 30%
- Day-to-Day – 20%
- Debt – 30%
- Sinking Funds – 5%
- Emergency Fund – 3%
- Fun – 2%
Because of our financial situation, these numbers do fluctuate from week to week. It requires prioritization. But because I am dedicating a specific amount to each account, I know that I will have money for groceries. I will have money for paying down debt. And I will have money for a little bit of fun too.
Now, you’ll notice that my sinking funds amount is small. That amount wouldn’t have paid for my son’s school. So, I have taken a little bit off the top of my recurring expenses percentage to add to my HYSA. It makes everything considerably tighter, but it’s worth it for the peace of mind to know that I will be able to pay for his school outright.
In the future, I would like to up my Sinking Funds percentage so that I can distribute directly from that.
The key to changing percentages is by freeing up money. This is done by raising your income—which I have done. I am now working three jobs in addition to working for my husband and his business (and homeschooling and running this blog). But it is also done by paying down debt and slashing expenses.
I’m already imagining what it will be like to have 30% of our budget back. That is even more motivation to pay down debt.
Step 5. Do your power hour.
I’ve told you before that when things were looking pretty bleak, I would spend hours and hours just fantasizing about the numbers we needed to make things work. At the same time, I about had a panic attack when I opened up our banking app. I’m not sure what I could have done differently at the time—I truly was trying my best—but really neither of those responses were healthy.
You shouldn’t have to think about money all the time. And you shouldn’t never open up your accounts and know where your money has gone. As always, there is a golden mean between these two extremes.
That golden mean is to do your finance power hour.
This is the term I’ve given to the time when I sit down and ‘touch’ my finances. I open up all my accounts. I look at all the due dates. I open up spreadsheets. I write things down. I notice, and I steward.
For me, this process really does take about an hour each week because I’m working on business and personal finances. But for you, this could be drastically shorter depending on your current situation.
The basic principle is you have to actually look, notice, and tend to the things that you have been given to steward. You can’t just get paid and hope for the best. You have to actually plan, prepare, and care for what you have.
Practically, this is what my power hour looks like:
1. First, I take care of the business side of things. I distribute money from the income accounts to the various checking accounts, run payroll, pay bills and debt payments, and make sure that things aren’t falling through the cracks. And, if there’s too much month at the end of the money, I prioritize.
2. Then, I take care of the personal side. I pay our Owner’s Compensation (our form of a paycheck) to the Recurring Expenses account. From that account, I distribute the money based on percentages. I do this as often as we get paid – generally weekly. But for you, that could look different, maybe changing to biweekly, even monthly. (I would recommend more regular checks of your accounts if you do get paid monthly to keep yourself financially aware.)
3. Then comes paying bills and making payments. I look at how much is in each account, and that is what I have to ‘work with.’ I have to prioritize paying what I need to pay in order to accomplish what I need to accomplish.
4. Finally, I look at how much is left over. Money that needs to be moved to my HYSA is moved then, any Sinking Fund Purchases are made, and if there’s money left over in the debt account, I make extra debt payments then.
It seems like a lot of information – and it can be! What I have found is the best system is to create a few master spreadsheets (or keep track of it on paper if you like to do math). I have:
- a Business Profit First spreadsheet with the business distributions (Get yours on the shop.)
- a personal Profit First spreadsheet with the personal distributions (Get yours on the shop.)
- and a master financial calendar with payment dates (Get yours on the shop)
This ‘suite’ of sheets makes it easy to see what needs to be paid when and how we are progressing towards our goals.
Personal Financial Power Hour | Google Sheets Personal Finance Spreadsheet
A budget helps you make the plan. The Personal Financial Power Hour helps you work the plan.
This Google Sheets personal finance system gives you one place to manage income distributions, recurring expenses, sinking funds, debt payoff, and long-term savings—so you can regularly sit down, see where your money stands, and decide what needs your attention next.
Instant digital product • Google Sheets • Reusable year after year
What about zero-based budgeting?
The Profit First method is not necessarily zero-based (like Dave Ramsey or The Budget Mom), but it can be. Instead of using cash envelopes, your bank accounts become the envelopes. In order to be truly zero-based, you then move any additional cash left over in the Day-to-Day account to either your savings or debt payment account.
I find that my current percentages work well without tracking every purchase. But if you need to rein in your spending more (or if you find yourself always borrowing from other accounts), you can track your spending.
Think of the Profit First Method as your budget. And the zero-based budget tracking is your bookkeeping.
One is telling your money where to go. The other is telling you where your money went.
If you would like to create a fully zero-based budgeting system, get Spend With Purpose. This will help you make a plan and track expenses.
Do you use cash in with the Profit First method?
I’ve actually created a separate cash envelope for myself and my husband that I put money into each week. This is the miscellaneous money that we use if we are going out to eat with friends or want to make an impulse buy. Having the extra cash reserve is helpful for making fun things not break the bank (or send us into debt).
You can use this method with cash envelopes too. Just treat the envelopes as a bank account when doing your distributions.
Spend With Purpose comes with 50+ cash envelopes to help you follow the cash envelope method.
Do you use credit cards in this method?
Credit cards are a tricky topic. For some, cards just mean extra points at the end of the year. For others, it’s a never-ending trap of paying down and running up balances.
You have to have the discernment and self-awareness to know which person you are.
You can use cards. If you do, you just have to be diligent about moving money out of the respective accounts into your debt account and paying off the balance in full each month. This needs to be a step in your power hour.
Budgeting By Buckets: A Simple Way to Follow a Budget
Have you tried budgeting by buckets? I’d love to hear your thoughts and which method you like the best!
You can comment below. And let me know what you think.
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Next time, we are going to be talking about Kids, Chores, and Money—and how to implement the bucket method with your kids to teach financial literacy.
Until then, keep creating a life you love and cultivating your heart for God. I’m Cayce Fletcher, and I’ll see you next week.
Personal Financial Power Hour | Google Sheets Personal Finance Spreadsheet
A budget helps you make the plan. The Personal Financial Power Hour helps you work the plan.
This Google Sheets personal finance system gives you one place to manage income distributions, recurring expenses, sinking funds, debt payoff, and long-term savings—so you can regularly sit down, see where your money stands, and decide what needs your attention next.
Instant digital product • Google Sheets • Reusable year after year
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