Today, we’re going to be taking a look at one more percentage-based budget known as the 6 Jars budgeting method.
There’s no doubting the fact that we all view and handle money very differently and that’s illustrated by the fact that there are so many different types of budgets out there to help us accomplish what is roughly the same goal.
To teach us what is and what is not worth spending money on and to simultaneously make sure that we’re living on less than we make so that our futures can be provided for.
Regardless of whether you’re working with a detailed budget, a reverse budget, a percentage budget, an automatic budget, a value or a time based budget, or some sort of custom budget they’re all working toward basically the same goal and today we’re going to be taking a look at one more percentage-based budget known as the 6 Jars budgeting method.
We’re going to be talking about what the 6 Jars budgeting method is? As well as what I like about it? What I think should be kept in mind while using it? And of course, who this budget might be particularly good for? And where it could potentially fail?
What is the 6 Jars Budgeting Method?
The 6 jars budgeting method is a budget that has been popularized by T. Harv Eker and is very similar to some of the other percentage-based budgeting methods that I’ve covered on this blog like:
I also covered the Zero-Sum budget
How it works?
According to Eker, you start by taking your income and split it into six different jars based on the following percentages:
55% of your money goes towards necessities which include things like food, rent, electricity, and recurring bills.
10% of your money goes towards long-term savings which include things like your rainy-day fund, big-ticket purchases like a new car, vacations, paying off debts, and unexpected medical expenses.
10% of your money goes towards the play jar as Eker puts it or the fun and entertainment items such as spoiling yourself or your family and other recreational activities.
10% of your money goes towards education which can include things like school but also coaching, mentoring, books, and things like online courses.
10% of your money goes into what Eker calls the Financial Freedom account and obviously that goes towards things like stocks and mutual funds, bonds, passive incomes such as businesses and side hustles, real estate investing, and basically any other form of investment you can think of as long as it helps you achieve your own Financial Freedom.
The final 5% of your money goes towards giving whether that would to a charity, a friend, or a family member in need.
If you’re interested in learning more about money management a recommend you to read
The Total Money Makeover by Dave Ramsey
Secrets of the Millionaire Mind by T. Harv Eker
for more you can check my personal finance booklist
What I like about the 6 jars budgeting method?
So, what I really like about this particular use of this percentage-based budgeting model that I don’t remember being specifically used in other similar budgeting methods that I’ve covered is that specific focus on education.
And, again, not just education like ‘go to school and get a degree’, although that’s one of the options, but also the focus on self-guided education through the form of books, courses, mentors, and maybe even webinars.
Using education to give yourself specific skills that you can apply to the market place is, in the end, how we’re all living. It’s also a crucial step in how successful side hustles are made.
For example, let’s say that John wanted to sell a book on how to lose weight, what skills will he need to acquire in order to accomplish that goal?
Well, he certainly would need the expertise for one, and be capable to write a good book, and those are maybe skills that he actually did learn in traditional school.
However, some other skills that most of us didn’t learn that much about in school unless we took some specific classes that John would also benefit from having include things like copywriting, marketing, and accounting.
We could go on and list a few other skills but the point is most of us probably didn’t learn much about these skills in traditional schools, again unless we took specific classes,
But that’s okay because any of us can read books, take courses on those subjects, or even find someone who has already become successful at doing whatever skill that we’re trying to learn and see if we can learn that skill directly from them.
And as John gets more practice and learns more of these skills, he will then be able to create even better books that help people lose more weight and keep it off and as a result, he will probably sell more than he ever did before and improve his bottom-line.
He may even decide to expand into other branches of business such as coaching clients one-on-one through their weight loss plan which will further improve his bottom-line.
It would also require new skills such as the ability to motivate people and just good communication in general but you get the idea.
Education can also help us save money
Education is very important for helping us to make more money but also important for helping us to save more money.
Reading books on budgeting and Frugal Living can help you get ideas and ways to save money that you wouldn’t have ever thought of on your own.
The other thing I really like about this use of the percentage-based budgeting method is that giving is also specifically focused on.
Now, it may only be a 5% and we can certainly debate whether it should be more or less than that and I’ll come back to that percentage in a minute but I do like the fact that it is at least there because I understand that some of us have more room in the budget to give than others but I do believe that giving, in one form or another, should be part of everyone’s plan.
What needs to be remembered?
Now, the things that I think we should keep in mind while using this version of the percentage-based budget is that the percentages are, to quote Eker himself:
“Recommendations and ultimately goals for you to get to… Not definitive rules. We believe the habit of managing your money is far more important than the amount, so if you can’t follow the percentages to the tee, then take an amount you can manage and start there.”
And I think that’s an idea worth pointing out because everyone’s financial situation is different as Eker pointed it out in the quote above
But I would also like to add my own personal take on what Eker said because not only our situation is different and it’s possible that our Necessities might cost us more than 55% starting out and we’ll have to kind of work our way down towards that kind of a number over time but our goals and dreams are also different.
What we value spending our money on and what we value getting from the money that we spend is different.
So with the 6 jars budgeting method or really any percentage-based budget that you come across when you get to what we really need to be thinking of, I believe is what are we trying to get out of our money?
Once we understand what we’re trying to get out of our money and what, to us, is worth spending money on we can come up with our own percentages and maybe automate those budgets based on those percentages as best as we can so that we can reach our own goals and live the life we want to live.
(I’m just using this as an example, I’m not saying that Eker’s budget doesn’t work, all I’m saying is that you can find the percentages that work best for you and your financial situation)
Eker has set a goal for us to put 10% of our money towards our financial freedom (the financial freedom jar included things like stocks, mutual funds, bonds, passive income, and other investments that are intended to help us achieve financial freedom).
However, what if one of the things that we really value the most was our financial freedom? What if we didn’t have quite as many material wants like some other people do but we really wanted to have that freedom to take a two-month sabbatical whenever we wanted to travel overseas?
That dream might be hard to accomplish, at least regularly, if we have a traditional 9 to 5 job unless of course we’re able to telecommute or we work for a real understanding and flexible company but unfortunately, at least right now, that’s not the situation for all of us.
I’ll explain more with this case
So, say for example that Jane earns $36,000 a year and follows the percentages suggested by the 6 jars budgeting system to a tee.
That means that she’s spending $19,800 a year or $1,650 a month on her necessities alone and saving $3,600 a year or $300 a month towards her financial freedom which is what she values the most.
If we follow the 4% rule which states that you need roughly 25 times your annual expenses saved in order to have a reasonable chance of not running out of money in retirement and we assume an average 8% rate of return on her investments it will take Jane roughly 32 years to become financially independent based on just her necessities.
If we’ve included the rest of her spending into this calculation it would, of course, take even longer, she’s saving 10% of her income for herself which means that in one way or another she’s spending or at least will be spending in the case of the long-term savings jar about 90% of her income in Jane’s case that would be $32,400 or year or roughly $2,700 a month.
Assuming the same rate of return Jane would need roughly 38 years to have enough money to be financially independent on her current lifestyle.
What I’m getting at here is that
in Jane’s case, since she values that financial freedom so highly she may want to adjust some of the percentages in that financial freedom jar so that she can live her dream earlier on in her life and if she doesn’t it’s quite possible this budget could fail her.
Unless she takes a page out of Eker’s playbook, the page that I wholeheartedly agree with and starts to generate a passive income stream or even multiple passive income streams through not just investing but also side hustles.
The idea being that this will not only raise her income so that that 10% savings rate will be more effective in terms of raw dollar value but also, in an ideal scenario, her passive income grows to enough to fund her lifestyle without actually needing to wait the 38 + years.
And Jane may even take this further and decide that she really wants to accelerate this process as much as possible in which case she could, of course, go to the passive income route with the side hustles while still working her full-time day job and simultaneously increasing that 10% savings rate to a larger percentage of your income.
Let’s say that Jane started a side hustle that allows her to take home an extra $1,000 a month on top of her day job and she raised her savings rate to a whopping 50% of her income thanks to some creative savings techniques.
That would mean, in this new scenario, she’s earning $48,000 a year and saving $24,000 a year.
Now, her financial freedom number is just 25 times the $24,000 that she’s spending per year as opposed to 25 times the $32,000 that she was spending before and since she’s saving roughly $2,000 a month she hits her $600,000 new financial freedom number in a little under 14 years assuming an 8% rate of return.
Who would the 6 jars budgeting method work for?
The nice thing about these percentage-based budgets is they’re capable of working well for pretty much anybody but I do think it would probably work best if you’re someone who already has a fairly good idea of what it is they value and fairly good idea of where your money is currently going
Because the downside to these percentage-based budgets is that they don’t have much detail at least in comparison to detail budgets like the zero-based budget
So it is possible to lose track of where exactly your money’s going but this is less of a crucial issue if you’re coming into the budget with your finances already relatively under control and your values surrounding money already relatively understood.
Thanks for your time
This was my approach to the 6 jars budgeting method. I hope you liked it and if you did then I recommend you to join my newsletter I post about money management and how to make money online.
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