Managing Your Income with Pots

Reaching the end of the month and wondering where all your money went? You’re not alone. Traditional budgeting can feel overwhelming, but there’s a simpler way: the pot system.

I first discovered the pot system in The Barefoot Investor by Scott Page. His approach involves breaking down your income into “pots,” each with a specific purpose. This easy-to-follow system not only helps you manage your money but also set clear targets for your spending, saving, and investing. Let’s explore how you can apply this method with a few adjustments to suit your personal needs.

What Is the Pot System?

Think of the pot system like digital envelopes. In the past, people would divide cash into separate envelopes for various expenses. Today, we can do this digitally, making money management simpler than ever. The pot system lets you allocate your money as soon as you receive it, ensuring you always have enough for the things that matter most.

Wondering what these pots are for? Everything. From bills and daily expenses to savings and future investments. By planning upfront and setting a percentage of your income for each pot, you can automate your savings and spending—ultimately allowing you to live with less stress and more financial freedom.

Why Traditional Budgeting Often Fails

Traditional budgeting usually involves:

• Tracking every penny spent
• Complex spreadsheets
• Guilt over purchases
• Constantly checking your balance

The pot system eliminates these hassles by managing your money at the source. Once your income is divided into pots, you can spend with confidence, knowing funds are allocated for all your needs. I’ve tried budgeting apps but found them too time-consuming. They work for a while but often end up neglected. The simplicity of the pot system makes it an appealing alternative for those of us who find traditional budgeting too complex.

Setting Up Your Pots

Before diving in, decide on a structure for your pots that aligns with your lifestyle and goals. Here’s a basic framework to start with, but customize it to fit your personal needs and priorities.

1. Expenses Pot (60% of Income)

This pot covers essential monthly costs, like rent or mortgage, utilities, and insurance. To get an accurate picture, review your recent bank statements and list all fixed expenses. Most financial experts suggest allocating around 50-60% of your income here, but if you’re currently above that, aim to work toward this goal over time.

Include expenses like:

• Rent/Mortgage
• Utilities (electricity, water, etc.)
• Phone/Internet
• Insurance payments
• Childcare costs
• Groceries
• Transportation

Consider setting up a separate bank account just for these expenses to prevent accidental overspending from this pot.

2. Daily Living Pot (10% of Income)

This pot is for day-to-day expenses, such as coffee, eating out, or entertainment. Start by allocating around 10% of your income, adjusting as needed based on your lifestyle.

3. Medium-Term Savings Pot (10% of Income)

For goals that require savings over a few months—like vacations, home upgrades, or special occasions—this pot helps you avoid last-minute financial stress. Consider creating smaller pots within this category for specific goals, like:

• Travel and vacations
• Gifts and holiday expenses
• Home improvements
• Personal items

4. Emergency Fund Pot (10% of Income)

Unexpected expenses, such as car repairs or vet bills, can derail your budget if you’re unprepared. Aim to allocate 10% of your income to an emergency fund, ideally stored in an easy-access account so you can withdraw funds quickly when needed.

5. Savings/Investing Pot (10% of Income)

This pot is dedicated to your long-term wealth-building goals. Start with 10% of your income, and increase the amount over time. To avoid temptation, consider storing this money in a separate bank or investing in a stocks and shares ISA for tax-free growth. Over time, this pot will help build a secure financial future.

Setting Up Your System

Digital Banking Options

Many modern banks, such as Monzo and Starling, allow you to create virtual pots within your account. Set up automatic transfers to each pot on payday, ensuring your money is divided before you have a chance to spend it.

Alternative Methods

If your bank doesn’t offer pots, consider:

• Using multiple traditional accounts
• Setting up standing orders for each category
• Tracking your pots manually in a spreadsheet or budgeting app

Making It Work

1. Automation Is Key

Automate transfers to your pots as soon as you get paid. This ensures the system stays in place without requiring constant adjustments, which makes it sustainable over the long term.

2. Regular Reviews

This isn’t a set-it-and-forget-it system. To keep your finances on track, regularly review your pots:

• Check balances weekly
• Adjust allocations monthly
• Track overspending trends
• Celebrate progress toward goals

3. Dealing with Variable Income

If your income varies month to month, base your budget on your lowest-earning month and allocate extra funds in higher-earning months to savings or future goals.

Tips for Long-Term Success

1. Start small—avoid too many pots initially.
2. Use specific names for each pot to keep your goals front of mind.
3. Set calendar reminders to review pots and make adjustments as needed.
4. Screenshot your growing pots as a visual motivator.
5. Share your system with someone for accountability.

Getting Started Checklist

• Calculate your monthly income.
• List regular expenses.
• Choose a banking or tracking method.
• Set up essential pots.
• Arrange automatic transfers.
• Schedule reminders for regular reviews.
• Share your plan with household members to ensure everyone is on board.

By organizing your finances with pots, you’ll gain greater control, reduce financial stress, and pave the way to achieving your financial goals.