The Jars Method of Budgeting

Recently my husband and I attended a T. Harv Eker seminar in Vancouver, British Columbia, Canada. Those three days have changed our view of investing and financial freedom forever.

One interesting thing we learned was the “Jars” method of managing your money. The key to financial freedom is to have more income than expenses. But even better than “earned income” is “passive income”. Passive income is money that works for you. It comes from two broad categories: investment income and passive business income. Investment income speaks for itself. We all know what it is: stocks, bonds, IRAs, etc. Passive business income, on the other hand, may need a little bit of explaining.

Passive business income is derived from businesses that you have created or built that, once built, take little to no maintenance but still continue to provide income. Examples are book royalties, car washes, vending machines, rental property (with a hired manager), etc.

To help explain the “Jars” Money Management Method, I will pretend I am a teenager with a part-time job, let’s say mowing lawns. I earn $100 any given Saturday in the summer. At the end of the day this is how I will divide up my cash.

Jar 1 Giving or Tithe 10% or $10

Jar 2 Financial Freedom Account 10% or $10

Jar 3 Long-Term Spending for Saving 10% or $10

Jar 4 Expenses 50% or $50

Jar 5 Education 10% or $10

Jar 6 Play 10% or $10

 Jar 1 – Giving

Put God first and He will take care of the rest. Put the first 10% into your Tithe jar and you will be amazed at how much further the remaining 90% goes. Many extremely wealthy people like Rockefeller and Carnegie have said that giving a tithe was the cornerstone of their success. Almost every religion places a high value on giving alms, tithing or giving to the poor. It is universally recognized as important in the road to success.

Jar 2 – FFA

The second most important jar is “Your Financial Freedom Account”, faithfully put 10% in this jar and you are on your way to winning the Success Game.
Do you remember the story about the “Goose that Laid the Golden Eggs” the goose is a perfect example of passive income. The farmer didn’t have to work for it he just went out every day and collected his golden egg and could sit back and enjoy his financial freedom.

This jar is your Golden Goose, invest this money in items that will produce Passive Income like Stocks, Bonds, Businesses, Income Producing Real-Estate, etc. but don’t do like the greedy farmer and kill this goose!

Under no circumstances do you spend this money! It must always be invested so it will begin laying eggs! Remember, without this money you cannot win the game!

It doesn’t matter how much you cut your expenses or increase your active income without this jar you cannot win the game!

Jar 3 – Long Term Savings for Spending

Ear mark this jar for some item you would like to buy rather than going into debt to buy it. Our example teenager would like to buy a car. Do not buy on credit, save for it and earn interest rather than paying interest to the bank. Do not buy it until you can pay cash from this account.

Jar 4 – Expenses

Pay your mortgage, food and other living expenses. If you can’t live on this amount you are spending too much and living above your means and you will never win the money game. Play the game to win, rather than to “not lose”.

Jar 5 – Education

Invest in yourself. Learn how to handle money, how to do things, how to think logically. Use this money to buy books and practical education.

Jar 6 – Play

Use this money to enjoy life. If you don’t, your “Right Brain” will sabotage your savings efforts. Don’t keep money in this jar longer than 3 months. Try to do something memorable with it. Go to the beach or hang gliding or something you have dreamed of doing. Don’t waste it on little things.

See Also:

• The Wealthy Buy Assets, the Poor Buy Liabilities, and the Middle Class Buy Liabilities Believing They Are Assets
• The Frugal Guide to Building Wealth
• Improve Your “Save-ability”
• Eliminate Debt Before You Retire

Image Source: Golden Goose- Meta AI, College Fund- Flickr