The key to wealth is being able to manage your money. Wealthy people are excellent money managers, compared with poorer people, according to an international motivational speaker on personal finance.
At his Millionaire Mind Intensive Seminar in Singapore, Harv Eker, an author, businessman and motivational speaker, introduced his audience to “the world’s simplest, easiest and most effective money management system”, his “Six Jars” system.
With this system, you separate your income into different accounts for specific purposes, which Eker labels Necessities (55%), Play (10%), Long-term Savings for Spending (10%), Financial Freedom (10%), Education (10%) and Give (5%).
Eker says you can use this system even if you think you don’t have much money to manage. What is important is that you develop a habit. He says that when your need for instant gratification kicks in, think: “Wealthy people think long term; poor people think short term.”
Here is how the system works:
• Jar 1: Necessities. Put 55% of your income into this jar. This is for necessities, such as paying accounts, buying food and clothing. If you cannot survive on 55% of your income, simplify your lifestyle, Eker says.
The most suitable account for the Necessities jar is a current account. It is ideal if you are earning a monthly income and make regular payments, such as rent, a mortgage bond or repayments to finance a vehicle. Such an account allows you to transact and manage your finances using your bank’s branch, an ATM, the internet or cellphone banking.
• Jar 2: Play. Put 10% into your Play jar. You should spend this money every month to pamper yourself. Eker says this will make you feel good about having money and spending it.
If you need to save up for things such as short getaways that require a little more money, you can accumulate the funds over few months.
The most suitable account for the Play jar, Eker says, is a transmission account. It has low transaction costs, but it does not offer you access to credit or cheque-book facilities.
• Jar 3: Long-term Savings for Spending. Put 10% into this jar. The money in can be used for major expenses, such as your children’s education and buying a house, and for building up a contingency fund.
The most suitable account for your long-term savings jar is a notice account, Eker says. In this account, money cannot be withdrawn immediately – instead, notice of usually between 30 and 180 days has to be given to the bank. The interest rate is normally higher than for other savings accounts.
• Jar 4: Financial Freedom Account. Put 10% into your Financial Freedom jar. This is your golden goose, Eker says. You must never spend the money that you put in your financial freedom account. This is to provide an income in retirement. (This 10% should be over and above what is coming off your salary to go into a retirement fund. If you are not contributing to an employer’s retirement fund, you should be saving at least 15% of your income for retirement – Editor.)
The most suitable savings vehicle for this jar is a collective investment scheme such as a unit trust or exchange traded fund where you receive above-inflation returns over the long term. To enjoy tax deductibility on your contributions, you can save into a unit trust retirement annuity, in which you cannot withdraw savings until you are 55 years of age.
• Jar 5: Education. Put 10% into your Education jar. The funds in this account are for your education, such as books, online courses and seminars.
The most suitable account for this jar is a notice account.
• Jar 6: Give. Put 5% into your Give jar. Use this money for donations to charities, or to help someone in need. If you are financially stressed and feel that giving money away is not in your best interest, you can give of your time for a worthy cause, Eker says. A transmission account is best for your Give jar.
Eker says the percentages for each jar can be adjusted to suit your preferences and affordability, but each jar should be used for its purpose.