Your Money is a Leaking Bucket

Use this concept to get a grasp over your personal finance.

Photo by Alexander Grey on Unsplash

Ever feel like your money is constantly slipping through your fingers?

That it's in control of your life rather than the other way around?

I've tried countless personal finance software and budgeting strategies over the years to fix this. I learned about double entry accounting; I tried envelop budgeting and even tried tracking every expense into extensive categories down to the last cent.

And my conclusion?

They're all a waste of time without applying the right perspective.

Enter the leaky bucket

Think of your money situation as a bucket of water with holes in it.

Money pours in as income and leaks out as spending. The difference between the two determines the amount of money you have.

Spending money is inevitable. So, no matter how much water you pour in, you're continually losing water.

That's why, before trying to add more money in, it's critical to understand why your money is leaking out in the first place.

To do this, ask yourself the following question every time you spend money:

Is this an expense or a savings?

Expenses: money for today

An expense is money you spend without the expectation of getting it (or more) back in the future.

Of this money, it can fall under two distinct categories: needs and wants.

A need is anything you spend money on to survive. This includes:

• The food you need to eat

• The roof over your head

• Heating, water and electricity

• Your health

• Any taxes you must pay

A want is anything you desire but don't actually need to survive. Examples include:

• Shopping that aren't groceries

• Expenses related to hobbies

• Eating and drinking out

• Holidays and travel

Obviously a lot of expenses could fall into both categories. (Is access to internet a need or a want? What about clothes?).

Only you can answer that for yourself:

What would happen to you in the short and long-term if you didn't pay it?

Your answer will help you assess the split.

Savings: money for your future self

Savings is money you spend with the expectation of getting it (or more) back in the future.

It can be money you put under your mattress or it can be money you've invested in income generating assets.

The point is, it's money you've chosen not to spend today as a need or want.

Savings is money for your future self.

In effect, this is money you're using to gain more control over your future situation.

• Build up enough savings to cover your expenses for several months and potentially losing your job won't be as stressful.

• Invest enough into a sound income generating asset and you'll be able to change jobs on your own terms.

• Do this long and consistently enough, and you’ll be able to retire early.

In short, your savings will increase the quality of your future life in a way that no material purchase ever could.

So, when looking at your leaky bucket, do the holes reflect your goals?

Takeaways

• Look at your spending through the lens of needs, wants and savings.

• Needs are expenses you need to survive. You can't do much about this.

• Wants are things you desire. Having fun now makes life worth living; but can you be more intentional here?

• Savings is money for your future self. The future is uncertain and saving takes time. So try to maximize saving, even if you have currently no reason to.

---