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The Jars System

I was introduced to the Jars System at the Millionaire Mind Intensive seminar in 2009. I was exposed to many cool ideas there and this was the most immediately useful and practical of all of them. They billed it as the world's simplest money management system - and I have come to believe in its power.

I Don't Need No Stinking System!

That was my first reaction. I know everything there is to know about money management (or so went my inner script). Besides, thanks to my wife, we track our spending very carefully and we don't need to change it. Thanks, but we are all set.

That was me reacting to change by resisting it. That is just what we humans do. I have finally come to realize that this kind of a simple system can help me make sense of our spending. More importantly, it will help us manage our finances better.

The Jars System

The basic idea behind the Jars System is very simple and very elegant. It is to divide the money that comes into your life into 6 jars according to certain target percentages. And then rearrange your life & your spending habits so that you stick to those percentages! So what are the categories?

Necessities: Target percentage 55%. This category includes expenses such as housing expenses (mortgage/rent, utilities, insurance, HOA dues), groceries and car-related expenses.
Fun: Target percentage 10%. This category is all about short-term fun! The savers in the audience were exhorted to make sure this money gets spent every month - and the spenders were told to restrict their fun spending to only this amount.
Long-term Saving for Spending: Target percentage 10%. Going on a cruise? Buying a big-screen TV? This is the jar for such expenses. And of course you ought not to engage in said activity until the jar contains sufficient funds - that's the hard part!
Education: Target percentage 10%. This would include all expenses towards education, from personal coaching seminars to tap-dancing lessons.
Charity: Target percentage 5%. These are your charitable contributions.
Financial Freedom Account: Target percentage 10%. This is by far the most important category. This jar is what leads you to financial freedom. This will include your 401k contributions (with employer match in the ideal world!), IRA contributions and such. We choose to add the principal portion of our mortgage payments into this jar as well.

Note that these are recommended percentages. It is more about a way of thinking than about sticking to "arbitrary" and externally imposed percentages.

Our Version

Our finances are all electronic, and we find it easier to maintaining "electronic" jars. Quicken allows us to create all kinds of reports. My wife has created 6 reports segmenting our cash flow into the 6 jars. The easiest expenses to categorize are Charity, Financial Freedom Account and Necessities. Education, Fun and Long-term Saving for Spending are the toughest because there is a lot of overlap among these categories. For example, when we bought the expensive racing inline skates for the kids, does that go into the Fun jar or the Education jar? When we think of buying the iPad, would that be Education or Fun or LTSS?

Many of these decisions get taken on an ad hoc basis, but by and large we have found that the jars system is easy to implement. We also find that data on a month-by-month basis can be misleading because of the "lumpy" nature of many expenses (such as car repair). We find it more meaningful to measure longer-term (say a quarter or more) expenses.

The Genius of the Jars System

We of course keep tracking our spending and maintaining good records. But that is the "trees" view of our finances. The Jars System provides us with a "forest" level view. It answers questions like: how much did we spend on necessities? Did we put away enough money in the Financial Freedom account? Did we invest into our education (of all kinds - from learning to rollerblade better to singing better to programming)?

Stephen Martile has written a very readable post on his blog detailing his experience with the Jars System. I agree with his conclusion:

If you just start splitting the money (regardless of the recommended percentages) I guarantee you’ll start to see results. The important thing is to build the habit.

I have come to appreciate the top-down view this system provides, and I plan to report on our own percentages in my monthly newsletter. Give it a try and see if it doesn't improve your Financial Defense.

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