Ramit Sethi: This Savings Account Feature Will Help You Build Wealth

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If you want to save money more quickly and productively with the goal of building wealth or reaching any other financial goal, finance expert Ramit Sethi said there’s one savings account feature you should prioritize: “savings buckets.”

In his guide on the “conscious spending plan,” Sethi explained how savings buckets are digital tools that let you separate your savings into different categories within a single account. “Most people struggle to keep track of multiple savings goals in one account. Buckets solve this problem by creating clear divisions for your money,” Sethi wrote.

Here’s how these accounts work, according to Sethi, and why they’re crucial to building wealth.

How Savings Buckets Work

Savings buckets let you create multiple subcategories within one savings account. For example, you can set aside funds for vacations, emergency savings and home repairs, all in separate buckets. Then you can clearly track the progress of each bucket without any extra hassle or transfers.

“The best part about this system is its flexibility,” Sethi explained. “You can move money between buckets whenever you need to without dealing with actual bank transfers.”

The bucket system functions similarly to the old-fashioned envelope budgeting system, only digitally. It allows you to visually see where each savings goal stands rather than just one large lump sum. This helps you make more progress toward financial goals.

Benefits of Using Savings Buckets

According to Sethi, using buckets helps you do a variety of important tasks:

• Simplify financial management: By clearly tracking multiple goals in a single place, you reduce confusion and makes money management easier.
• Qualify for better banking perks: By maintaining a higher combined balance, you’ll get the benefit of greater interest earned, particularly if you’re saving in a high-yield savings account. Additionally, sometimes banks reward customers who keep larger sums with waived fees. 
• Stay motivated: By visually tracking your progress toward specific savings goals and clearly seeing incremental progress in each bucket, your motivation and discipline can encourage more savings.
• Prevent impulsive spending: Sethi noted, “Buckets add a layer of accountability, helping you think twice before dipping into your savings.”

How Many Buckets Should You Have?

Sethi recommended starting simply with three core buckets:

1. Emergency Fund: Set aside enough money to cover three to six months of essential expenses. This bucket can be a financial safety net for unexpected costs or income disruptions.

2. Short-Term Goals: Buckets allow you to save funds for expenses you anticipate within the next one to two years, such as annual insurance payments, holiday spending or car repairs. You won’t find yourself in a pinch with buckets already presaved.

3. Big-Picture Goals: This bucket includes long-term goals like saving for a down payment on a house, planning a dream vacation or starting your own business.

“Your bucket system should evolve with your life,” Sethi wrote. “Don’t be afraid to adjust categories as your goals and priorities change.”

You can always add buckets tailored to your specific lifestyle and objectives, such as dedicated funds for weddings, education, charitable giving or even a car replacement fund. 

Sethi’s Tips To Reach Your Savings Goals Faster

To make the most of your bucket savings system, Sethi recommended the following steps:

• Automate your savings: Set up recurring transfers to your savings buckets each time you’re paid. Automation removes the temptation to spend money or skip contributions.
• Prioritize spending: Regularly assess your expenses so you can move funds from less important expenditures to your savings goals. 
• Choose the right account and stick with it: Switching accounts in pursuit of slightly higher interest rates can be counterproductive. Select a stable, competitive account with good features and minimal fees to maintain focus.
• Increase your income: Look for ways to earn extra money through side hustles, freelance work or negotiating raises. Put more of that toward your savings goals.
• Use windfalls wisely: Apply the 50/30/20 rule when you receive unexpected income. Allocate 50% to savings, 30% to debt repayment and 20% for personal enjoyment. 

By adopting these strategies, Sethi argued that savings buckets will simplify your finances, enhance your saving habits and help you build wealth more effectively.

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