The Jar System

Being a trained Chartered Accountant I have always taken pride in managing my finances, keeping tab of my income and expenses, receipts and monitoring my budgets.

However, recently I learnt a new money management technique called the ‘Jar System’. Surprisingly basic and simple, it encourages good money money management habits with minimal monitoring and intervention.

Here’s how it works. Divide your money between 6 jars and label the jars as follows:

1. Financial freedom account (FFA): The concept of financial freedom revolves around building the financial ‘golden goose’. To fatten up, each month 10% of your income is allocated in this jar. Funds in this jar can be used to invest, start a business, create a passive income streams etc. Most importantly, you can only eat the ‘eggs’ or income from the money invested from this jar, whilst the sticking to the rule of ‘never killing your golden goose’.
2. Necessities (NEC): This is the bulk of your monthly expenses. The basic allocation rule is to put 55% of your income into this jar to cover your necessities. Examples of expenses to be paid from this jar are mortgage repayments, car loans, grocery bills, petrol, tolls, food and other living expenses. The key to increasing funds in your other jars is to ‘simplify’ this area by ‘living simply’ or ‘frugally’. Hence excess funds here can be directed to the other jars according to priorities. For example your priority this year is to save enough to cover LASIK costs next year (LTSS fund). By reducing your grocery bills for examples by switching from premium brands to store brands, you could achieve this dream sooner.
3. Long term saving for spending (LTSS): 10% of your monthly income is allocated to this jar.The fund here covers items such as family vacation, the LCD TV, car repairs and maintenance etc. This jar can also be your emergency expense funds to cover the unexpected events that life brings such as medical and repair emergencies.
4. Education (EDU): 10% from your income goes to this jar. This jar recognizes that the most important investment is ‘YOU’. Funds can be spent in buying books, attending seminars and courses, musical lessons or simply put in saving accounts to pay for that MBA or Masters course you have been dreaming for. If humans are trees, than education is the water that keeps it alive. ‘If we are not learning, we are dying’
5. Play: This is one jar that MUST be blown each month! 10% of your income for you to have fun guilt-free. Use it to go to a fancy restaurant you’ve been eyeing, or a massage at a spa. Just do something fun. Let your inner child play.
6. Giving (GIV): Allocate 5% of your income to give to charity. If you want to allocate 10% for giving, take 5% off your NEC jar.

Monitoring could be done via physical jars, although this may not be feasible for huge amounts. Alternatives would be to create 6 different bank accounts in which you transfer money to each month based on the allocated percentage as above. You can also use software such as available free at ‘My Finance’.

Most importantly, this is about creating good financial ‘habits’. The amount could be as small as $1 to millions, but the principles remain.