I’ve always tracked my spending using software from Microsoft Money to Quicken 2017. These applications made it very easy to import and categorize my transactions and see how much money I had left each month.
Though I was tracking my spending, I would always have an unexpected expense pop up such as an auto repair or an irregular expense that I was unprepared to cover. I knew I needed a strategy that would reduce the unexpectedness of expenses that would come around irregularly.
I found that strategy when I stumbled upon the book Secrets of the Millionaire Mind by T. Harv Ecker. In his book Harv introduces his readers to the 6 Jars money management system. The idea of the system is to separate your income into 6 different accounts for specific purposes.
The jars themselves aren’t actually that important. What’s more important is the money management system behind them. I manage my system from a set of bank accounts. One of the benefits of using this system is that it’s very flexible. With this flexibility, you can adjust the percentages that works for your current situation. I have also adjusted the system by adding additional jars.
I will go over the original system and then I will show you how I use the system to suit my needs.
The Original System
Financial Freedom Account (FFA – 10%):
This is your golden goose. This jar is your ticket to financial freedom. The money that you put into this jar is used for investments and building your passive income streams. You never spend this money. The only time you would spend this money is once you become financially free. Even then you would only spend the returns on your investment. Never spend the principal.
Long-term saving for spending Account (LTS – 10%):
Money in this jar is for bigger, nice-to-have purchases. Use the money for vacations, extravagances, a plasma TV, contingency fund, your children’s education etc. A small monthly contribution can go a long way. You may have more than one LTS jar. If you have more than one LTS, divide the 10% between the jars according to your priorities.
Education Account (EDU – 10%):
You can use the EDU funds (usually 10% of income) for your self-education, for examples, books, seminars and events etc. Everyone needs to learn, especially in this fast changing world. Grow your comfort zone through learning and risking. Challenge yourself! There are only two things to remember in this world, if you are not growing, you are dying!
Give Account (GIV – 5%):
Money in this jar is for giving away. Use the money for family and friends on birthdays, special occasions and holidays. You can also give away your time as opposed to giving away money. You could house sit for a neighbor, take a friend’s dog for a walk or volunteer in your community or for your favorite charity.
Necessity Account (NEC – 55%):
This account is for managing your everyday expenses and bills. This would include things like your rent, mortgage, utilities, bills, taxes, food, clothes, etc. Basically it includes anything that you need to live, the necessities.
Play Account (PLY – 10%):
You are supposed to spend this money every month to pamper yourself. The key is to BLOW this Play money away every month so that you will feel good about having money and spending it! You should feel guilt-free when you spend this money every single month. You could purchase an expensive bottle of wine at dinner, get a massage or go on a weekend getaway. Play can be anything your heart desires..
My Modified System
My system includes all of the above mentioned jars and adds 3 more
Short Term Savings:
This jar is used for saving for short term spending, things such as yearly expenses, birthdays and holiday gifts.
This jar is used for paying down my debt. One of the last things I account for is extra money to accelerate my debt paydown.
This jar is used like the financial freedom jar except that you will use this jar while paying down your debt. I use this jar to fund my investment accounts.
My Custom Allocations
Necessity Account (NEC – 95%):
Financial Freedom Account (FFA – 2%):
Long-term saving for spending Account (LTS – 1.25%):
Education Account (EDU – .3%):
Give Account (GIV – 0%):
Play Account (PLY – 1.35%):
Short Term Savings: (STS – 1.5%)
Debt Paydown: (DP – 90% of remaining funds)
Investing: (INV – 10% of remaining fund)
Now that you have a basic overview of the jars or categories I use for my system, in the next post I will go over the process of the system.