“The habit of managing your money is more important than the amount”
– T. Harv Eker
Until a few weeks ago, I thought I did a pretty good job of managing my money. Then, I attended the Millionaire Mind Intensive seminar in London and found out how wrong I was. At the seminar we were introduced to the ‘Jar System’ for money management, explained in depth in T. Harv Eker‘s book, Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth.
I thought that because I had a detailed spread sheet showing my income vs. expenditure, and that I looked at it once a month or so to get a rough idea of where I would likely be financially in the coming weeks, I was doing a good job of managing my money. I thought the fact I had a spread sheet was even a little anal, and thus that it was likely not many people even had that.
On the face of it, my money management technique seemed to tick all the boxes, and given that I had numbers which give me a breakdown of income and expenditure, and that I was actually looking at them, it’s easy to see why I mistakenly thought I was doing a pretty good job.
However, despite using my system to track my finances month by month, I never seemed to be able to get ahead financially. No matter how much I studied the numbers, there always seemed to be surprises that resulted in more going out each month than was coming in. I could blame various external factors for my being in this situation, but realistically there is only one person to blame – me. Having had the ‘Jar System’ explained to me, I decided it was time to grab my finances by the balls by becoming an excellent money manager.
The first problem I saw with my old system was that everything was in the same pot (or account). This meant that as I get paid weekly, I was easy to get a false sense of security from the weekly wages coming in each week and topping up the balance. Getting paid weekly means it’s very hard to see the situation for what it really is, because those weekly top-ups mean your balance never really gets down to zero until it’s too late. Having everything in one pot also meant it was very difficult to track what I was spending on what. How much had I spent on leisure last week? Coffee from Starbucks? I challenge any one of you to not come away surprised having analysed your spending habits over the course of a month or two… it’s amazing how that odd coffee here and there adds up over the course of weeks and months!
Having everything mixed up in one account like that just muddies the waters and invites chaos into your financial life; it’s not worth the stress!
The other major problem I identified was that there was never any money left to do what all the books, videos and my mentors kept telling me was essential if I wanted to start building wealth – pay myself first.
I want to take a moment to talk about the concept of paying yourself first, as it’s something I didn’t understand fully for some time, and it’s important you understand what this principal means so you can effectively execute it in your financial management. It is the only way to build wealth, and it is the only way to get to a point where you are financially free.
Paying yourself first does not mean getting your wages each week/month and purchasing all the leisure and luxury items you desire before allocating any money to paying your essentials; bills and living expenses. Paying yourself first simply means that you make it a habit to pay a portion of your income into your Financial Freedom Account each and every week/month/year. This is the pot of money that is going to work FOR you, so you don’t have to work for money. You never spend this money, only invest it – more on this shortly.
Paying yourself first is the highest form of financial intelligence. This is the your path out of the rat race, and into financial freedom. This is the most important thing you will ever spend your money on, and is what will give you more and more choices and resources as the years go by. Obviously, you still need to pay your bills – everyone needs food in their belly and a roof over their heads, but it is this simple act of paying yourself first that separates the middle class from the billionaires. The simple concept of delayed gratification rings true, in that paying yourself first and saving buying luxuries for later results in greater wealth, and therefore greater luxuries – if you are prepared to wait and play the long game by paying yourself first before wasting your money on liabilities you like to call luxuries.
So, what is this ‘Jar System’?
It is the simple technique of allocating set percentages of your weekly/monthly income to various different accounts to improve money management. The jars, and their respective income allocations, are as follows:
- FFA: Financial Freedom Account – This is the most important jar, as briefly discussed above. The money you pay into this jar should NEVER be spent – only invested. This is the pot of money you employ to work for you, returning passive income whilst you sleep. It is suggested you pay 10% of your weekly/monthly income into this account each and every pay period without fail. You’ll be amazed how quickly this builds up and how quickly it will start to pay you if invested wisely. This is your Golden Goose, perpetually laying you Golden Eggs – don’t murder the goose, just keep steadily collecting her eggs for the rest of your life
- EDU: Education Account – This is the second most important jar for the simple reason that learners are earners! The more money you have available to spend on your continued education and personal development, the more capable you will be at earning higher levels of income, and the more income you earn, the more money you put into your Financial Freedom Account – in turn, the more money in your FFA, the more passive income it will generate for you. It’s a beautiful chicken and egg situation that just keeps giving, and this is the beauty of compounding. The more you learn, the more you earn, which is why these two jars are inextricably linked. It is recommended that you put 10% of your weekly/monthly income into this jar, and this should be reserved for any education or training that will help take you and your life to the next level of mastery
- PLY: Play Account – All work and no play makes Jack a dull boy… the purpose of this account is precisely what it says on the tin; it’s a pot of money for you to enjoy. It is recommended that you pay 10% of your weekly/monthly income into this account but it’s slightly different from the other accounts we’ve been through so far as you must spend everything in this jar each and every month without fail. If not every month, then definitely every quarter (3 months)! Use it to buy luxuries and things you wouldn’t normally allow yourself to indulge in – you could have a spa day with your partner, a massage, or a day out shopping in the big city, it doesn’t matter so long as you have fun! If we’re spending most of our lives working hard to generate income, then it’s important for our mental health that we allow ourselves to enjoy it. This jar allows for that, and ensures you have some money each month to spend on the finer things in life
- GVE: Give Account – Contribution is such an important part of life, and that’s why this jar is dedicated to just that – giving back. It is recommended that you allocate 5% of your weekly/monthly earnings to this account, and it should be used for the benefit of others. It could be a regular monthly donation to charity (if you can fin one that pays a majority of it’s donations to the cause in question rather than most of your donation being eaten up by salaries and marketing campaigns), a donation to your local church or school, or even for birthday and Christmas presents for friends and family. After all, if you can’t give £5 now, what’s makes you think you’ll give £500 when your financially successful? We are the product of our habits – you will not be trusted with more until you have shown the ability to properly manage what you already have. It’s important to remember that the more we have, the more responsibility we have to give back, and that’s often a major driver for successful and wealthy people – they know that the more wealthy and influential they become, the more people’s lives they can touch and the more able they will be to help those in need; for those who have the ability, it is our duty to have more so we can give more. It sounds counter-intuitive, but there’s more than enough to go around. The income gap is a myth – there is no income gap; it’s an education gap, resulting from a severe lack in financial intelligence and general life literacy
- LTSS: Long Term Saving for Spending – This is you account for saving for those high ticket price items that might take a little longer to save for like a holiday or piece of tech gadgetry. You can have as many of these as you need to suit your saving requirements – I have three; one for a holiday, one as a contingency account, and one simply labelled ‘kids’. Overall, 10% of your weekly/monthly income should be allocated to these accounts – that’s 10% across all of them, not to each of them. So, for me, I allocated 3.33% to each of my three accounts; if I had four accounts, I would allocate 2.5% to each etc. The total allocation to all of your LTSS accounts should only be 10% of your weekly/monthly income. You can set saving targets for these accounts, and obviously spend the money on whatever it was you were saving for when you hit your predetermined target
- NEC: Necessities Account – For me, this is my main account out of which all my bills are paid, and into which all my income is paid. This account is used for all of life’s necessities such as food, electricity, clothes (clothes you need, not clothes you want – there’s a difference), mortgage etc. It is recommended that you allocate 55% of your weekly/monthly income to this account to cover all of these essentials. But what do I do if 55% isn’t enough to cover all my essentials? Well, then K.I.S.S. – Keep it simple stupid! Basically, you will need to be very harsh with yourself. Often people will count things as essentials that are luxuries and not really essential to their everyday existence – but they like them, and have grown accustomed to them, so the thought of giving them up is psychologically painful and this is why our monkey mind tricks us into thinking these things are essential. Call yourself out on your bullshit. Can you stop spending on any non-essentials? Can you buy the same or similar product or service elsewhere at a more competitive price? Can you reduce the frequency of things like hair cuts and the ‘essential’ Starbucks visit on the way to work each morning? Remember, the trick is to keep it simple – if you are over allocated in this area, you need to figure out ways to simplify your life and reduce costs. Not easy, but something that is guaranteed to pay dividends in years to come
So there you have it, those are the different jars in the money management system – extremely simple, and extremely effective if you can muster the discipline to master them and manage them as laid out above.
Obviously, it isn’t really practical to have actual jars for this system, so I would suggest speaking with your bank to get these jars set up as additional accounts so you can set up regular repeat payments to automate the system and manage everything easily on-line. All I did was speak to my bank and ask that they open an additional 7 savings accounts for me – no cards or overdraft required for any of the accounts as everything is managed online and any spending comes straight out of my current account. Within 40 minutes, the helpful chap on the end of the phone had all my additional accounts set up and ready to rock ‘n’ roll. You can even rename the accounts on the on-line platform with some providers so you know which account is which.
Now, all I have to do is move my predetermined percentages each week into the various accounts. This puts everything in separate jars so I can easily see what I have available in each, and means I pay myself first each and every week without fail!
Although I have provided recommended percentage splits for you to set up your own Jar System, it’s okay to adjust these to suit your own personal situation if you’re really struggling to get the recommended percentages to work. The important thing is that you implement the system, and segregate your income, and that you practice this new habit diligently every single day. Even if you can only start with percentages of £1 in split into each jar and then double it each following week/month, that still gets you off the starting line and puts you ahead of everyone else who’s doing nothing. Remember, it’s the habit that’s important – make excellent money management a habit, and it will favour you with handsome returns perpetually.
You can also add additional accounts you might require to serve your specific circumstances; for example, I have spoken in terms of net income figures in this blog, but if you are self employed you may wish to add a ‘Tax’ jar to your money management system. What ever you need to do that’s in keeping with the principals of the Jar System to make it work for you is fine, and adaptations in this regard are encouraged.
Using this system has seriously upgraded my money management skills and has revolutionised the way I think about how I manage my money. It’s liberating and exhilarating both at the same time because I can see the potential of using the system and what that means for me and my family in the years to come.
I am an excellent money manager – and you can be too. Take control of your finances, and take control of your life before they take control of you.
For more information on how to grow your FFA (Financial Freedom Account) and make your money work for you, check out the following book on trading the stock market by Robbie Burns:
This book and others like it provide a fascinating insight into one of the most misunderstood things on the planet – the stock market. Whilst it’s true that there is a 90% failure rate amongst people who take up trading, it’s also true that those people are not educated and do not understand the stock market. These people are gamblers and speculators, and it’s no wonder they end up blowing their account equity in short periods of time. The stock market is an excellent way for anyone to make their money work for them – the only prerequisite is that you put the time in to learn how it works. Trading is an excellent way to build your wealth by making your money make you money – even whilst you sleep. Robbie’s book is interesting, humorous and jam packed full of excellent information on how to get started in the world of trading.
Another great resource containing a wealth of great investing advice is Tony Robbins latest book:
This is basically an overview of all the high value content in his previous book, Money Master the Game: 7 Simple Steps to Financial Freedom, and well worth a read for anybody interested in investing – and that should be everyone!
My final reading recommendation is perhaps one of the best books I’ve read to date on investing and trading, and is this classic by Benjamin Graham:
This is a meaty book quite literally filled with excellent advice and a wealth of knowledge relating to the world of investing. It covers strategies and principals endorsed by the great investor Warren Buffett, and was in fact one of the first books he read on the subject – one that helped to form the foundations upon which he has built his financial empire, and huge successes as an investor.
A slightly longer blog than usual today, but with some recommended homework and further reading which I hope will add to what I’ve shared here and that you will find interesting and informative. I hope you found this information useful and I look forward to seeing you become an excellent money manager through implementing this system and these principals in your life!