Sweeten up your Savings with the Cookie Jar Method
To know the latest in investing is always recommended, but once in a while, it is important to take a step back and focus on the prerequisite of investing: a money saving habit. Let’s look at one of the most fundamental methods, the cookie jar method.
Remember your grandmother putting away money in grocery tins? The cookie jar method is just an improvised version with a modern name. But an effective one nevertheless!
The idea is simple.
When you get money such as your salary, the first thing to do is to divide it in separate ‘jars’ for your needs, emergencies, investment and even charity.
One way these jars can be divided are:
- 50% for the essentials: this jar is for your daily needs such as rent, food, utilities. In short, the basic requirements for day to day living.
- 30% for the future: this jar is for your savings and investments, that you do not touch once allotted. A discipline to be followed diligently.
- 10% for emergencies: this is your emergency fund jar, because life is full of surprises. These surprise can sometimes be unpleasant and may cost money to fix.
- 5% to indulge: your spending money!
- 5% towards charity: because when you have, it is good to share.
There can be little tweaks to the division as per your likes and wants. Whether it was jars in good old times or bank accounts presently, the main idea behind the system is to get into the habit of saving, and sticking to commitments made about spending.
The cookie jar system works because:
- It helps you visualize and mentally divide your money.
- It is applicable for everyone from children to working adults, no matter how much money they have.
- It builds discipline, the most required quality for investing.
- When your commitments are strong and clear, your finances are healthy. For instance, when markets go up and down (which any advisor will assure you they will) you will be able to stick to your habit, without panicking, and keep an eye on the long term returns.
“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” Warren Buffett