Budgeting is one of those topics in Peronal Finance that most people avoid… mainly because they think that if they put a budget together, they’ll be limiting themselves from enjoying their lives and their money.
But proper budgeting can actually be very liberating and it can help you do all of the things that you want to do with your money.
This budgeting method is meant to keep things simple, address every area of your financial life, and provide you with freedom to do the things that you want to do that cost money.
The Jar Method is the idea of splitting your income into 6 different jars. This was developed when offering advice to young individuals, but when you morph the idea into one for adults, the 6 jars will turn into 6 accounts.
The breakdown of the accounts is as follows:
Necessities – 55%
This is the account that holds most of your money as it is intended to pay for your bills.
- Rent / Mortgage
- Credit Card Payments
- Basic clothing needs
Financial Freedom – 10%
As the name implies, this account is dedicated to your financial freedom – AKA your nest egg or your retirement account.
- The funds in this account are NOT to be touched, ever.
- The only time you touch these funds is when you’re getting ready to retire.
- This account will not be a basic checking or savings account. It will be an Index fund or a brokerage account.
Long Term Savings for Spending – 10%
This account is dedicated to major purchases that you want to make that you would normally finance or use a credit card for.
- Instead of buying a TV or entertainment system with your credit card and paying interest for it, you would save the monthly payments that you would have made into a liquid savings account and make the purchase with cash when you’ve saved enough.
Education – 10%
As the name implies, the money in this account is to be used to educate yourself and further develop yourself.
- Books, Audio courses, Home study courses, seminars, personal coaching, etc.
Play – 10%
The money in this account is to be used to buy the things that you WANT not the things that you need.
- If ever there was a time to splurge on something, this would be it.
- The money in this account must be spent every month, at max every quarter and it should only be spent on things that make you feel good.
- If you have enough to rent a row boat for 30 days, or rent a yacht for 30 minutes, rent the yacht.
Give – 5%
This is for charitable giving and donations.
If your income is limited and you have a lot of expenses/necessities, take 10% of your overall income and split it into the remaining jars. The idea is to get good at managing your income and dedicating it to the various areas of your life apart from your basic necessities.