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The Theory of 4 Buckets, make your money grow

By Edited May 5, 2015 9 14


I came up with the theory of four buckets when I was trying to explain to my sister in law how to better manage her money and make it grow by tweaking a few simple things. The idea was to picture 4 buckets sitting on the table in her house; the buckets would be labelled as follows: Transaction Account, Savings Account 1, Credit Card, and Savings Account 2. Every time she received her pay she would divide the money into the buckets, the buckets were a metaphor for banks accounts. The best place to start is to explain the purpose and use of each of the buckets and then finish with an explanation of how it works.

Transaction Accounts

Just like a worker ant this is where all the hard work happens in terms of money coming and going and just like the worker ant this is where your money is most vulnerable to being squashed with temptation to spend. The first thing to know about Transaction Accounts is that they are not your friend they are your enemy, they provide you with interest rates less than 0.1% and they charge you fees.

The best way to manage a Transaction account is to only have as much cash as you would need in a week. When you get paid or receive money keep enough money in the account to last you the week and then transfer the rest into a high interest eSaver account. At the end of the week you can always transfer money back to the transaction account. By shifting your money weekly the money which is in the eSaver can gain interest and grow.  I find that a balance of $200 in my Transaction account is often enough to get me through a standard week.

Tip 1: Money grows much quicker in an eSaver 

Savings Accounts

eSaver Accounts have changed banking the same way that iPhones have changed the telecommunications world. When eSaver accounts first hit the market they were heavily restricted in terms of having to have a linked transaction account at the same institution (which you were charged fees for) and it was essentially a dumping ground with no ability to pay bills or easily access money.  The eSaver has now evolved to accommodate Bpay, third party payments and also the ability to link the account to other institutions. The competitive rates of the esaver have also brought into question the need for term deposits.

Interest in an eSaver is often calculated daily and paid monthly; this form of compounding interest is favourable as it takes into account the balance of your account for every day of the month. By transferring money into an eSaver account at the start of the month and then withdrawing it to pay your bills, you can gain a level of interest which would have been missed if you had left your money in a Transactions Account.

Tip 2: Money in a Savings account uses compounding interest to help grow quicker

Credit Cards

First step with a credit card is to pay it off, before you can benefit from your credit card you need to stop the credit card from benefiting from you.  Now that you have a clean slate, find a credit card that works for you. There is a wide range of credit cards on the market so ensure you take your time shopping around. Try to get a Credit Card which has a low interest rate and a good rewards program, if you spend a lot of time in the car get a card which offers discounts on petrol, most rewards credit cards offer cash back offers, ensure you pay the money back onto the credit card or use it to offset your annual fee.

My credit card strategy is to use my Credit Card throughout the month for food shopping, petrol and other expenses and then pay it off at the end of the month. Always ensure you have enough money in your savings account so that you can pay off your Credit Card and not let the balance snow ball over a few months.

Tip 3: Always pay your Credit Card back to $0 each month

How does it work?

Step 1: Rough Budget

First step is to calculate a rough budget to understand how much you need to put away each week, this can be done by following the below steps:

  • Group your Bills into Weekly, Fortnightly, Monthly, Quarterly and Annually
  • Total each of the above categories ( you should now have 5 figures , Weekly, Fortnightly, Monthly, Quarterly and Annually)
  • This example uses the assumption that you are paid weekly , Divide the fortnightly category by 2, you now have a rough weekly figure for these bills
  • Divide the monthly figure by 4 to get a weekly figure
  • Divide the Quarterly and Annually figures by 12 and 52 respectively
  • Now add the 5 new totals together and you have a rough weekly total

Step 2: Setting up your accounts

When setting up bank accounts remember to shop around and read all the details in regards to the account. You will need a Transaction Account, 2 eSaver accounts and a Credit Card ( the Credit Card is optional).When it comes to eSaver accounts I like to have them at a different bank, this way if one of the bank changes their interest rate and the other doesn’t only one of your accounts will be affected. Link your Transaction account to both of your eSaver accounts so you can transfer money to both of the accounts.

The 4 Bucket Theory

The First Bucket is your Transaction Account, this account should carry a small balance and be used for your weekly expenses if you are not using a Credit Card and it should also be used for other cash sales.

The Second Bucket is your first eSaver account; this account is used for all your bills and a place to keep all your cash that you don’t want to keep in your transaction account. This account is functioning properly when there is enough money in the account to pay your bills when they are received.

The Thirds Bucket is your credit card; use your credit card for all your monthly spending including petrol, food shopping and other expenses. At the end of the month use your second bucket to pay the credit card balance back to $0

The Fourth Bucket is your set and forget account. Every week you should ensure you put money into this account. If you ask your employer they are often happy to transfer a portion of your wage into a different account. The objective of this account is to save for future large expenses such as buying a house or going on a holiday.

By using the theory of 4 buckets you will ensure that money which you are not currently using will be stored in a high interest account and grow at a much quicker rate. A low income earner who uses this method should gain enough interest to go out for a nice dinner to celebrate at least once every quarter. 

Where to from here?

Once you have a large amount of money in your Fourth Bucket you could consider locking some money away in term deposits or investing in managed funds. Ensure you read into these accounts before you sign up. Aj's books has a range of great articles to help with term deposits.

Good luck and happy savings



Aug 28, 2012 5:05pm
Great advice, and some it's amazing how simple the solution is. Yet, so many struggle with implementing it.
Aug 28, 2012 5:05pm
Great advice, and some it's amazing how simple the solution is. Yet, so many struggle with implementing it.
Aug 28, 2012 5:42pm
Thanks Fast Eddie, often its the simple solutions that we overlook as we over complicate the situation
Aug 28, 2012 5:42pm
This comment has been deleted.
Aug 28, 2012 6:38pm
Great Article! Congrats on the feature!
Aug 28, 2012 6:47pm
Thanks Srice9799, fingers crossed for another
Aug 30, 2012 12:40am
Great! Good tips, the only other thing one needs is to practice self-control! Thumbs up!
Aug 30, 2012 2:08pm
I help a lot of people with debt solutions but most just do not get this. What gets them the most is credit cards and how they think they are so wonderful and beneficial but like you said "before you can benefit from your credit card you need to stop the credit card from benefiting from you."
Sep 14, 2012 5:34am
I think people should have to do a course on credit cards and compound interest before ever being allowed to have one. It's a dangerous thing, and like many dangerous things, should not be in the hands of those who don't understand it. Great article!
Oct 8, 2012 12:56am
This is like envelop method but a very unique tool used - buckets. Creative indeed! and the explanations are great! keep writing!
Oct 15, 2012 2:25pm
Good way to explain it!
Oct 21, 2012 4:34pm
I have found that just by having a plan for my money every month I am able to save way more. I know exactly where it is going before I get paid. I also give myself a weekly allowance for fun, some weeks I do not spend all of it therefore the next week I have more money for that week if I want to make some kind of larger purchase or go out to eat. Developing a well thought out plan is crucial to getting a grip on your finances.
May 10, 2013 10:22am
Great information. I've been teaching my daughter a similar system for using with her allowance. At 10 she already understands how to save and live within her means. She can tell the difference between a want and a need and understands how to obtain each within her "budget." Great share!
Sep 16, 2013 11:36am
I think we all need to know about the 4th bucket here, I imagine it is the least used but the most important
Jan 4, 2014 12:26am
Excellent article!!
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