How well we manage our money is more important for our financial wellbeing than the size of our income.
You see…the default for most of us is to pay for whatever we need to pay for and then “save” the rest.
This is not a sound financial plan.
Most Australians live paycheque to paycheque.
While there are numerous root causes for this, they all manifest as a failure to manage money effectively.
So what is it that successful people do to get out of ‘the rat race’?
Well…one thing is that the Rich manage their money well while the average person mismanages their money well.
Just to make things clear…this is not a judgement about the rich or the poor, and I’m not suggesting rich people are smarter than average – what I’m saying is that they have better money habits.
One of the principles used by many wealth people is one or another variation of the 5 Jar method – something I came across many years ago.
While it’s based on Biblical principles, please don’t let that put you off, as these are practical guidelines are timeless and have been passed down from generation to generation.
Check out this Infographic that explains the principles and then scroll down and I’ll explain then in more detail.
More details about the 5 Jar Method…
Jar 1 – Responsibilities and Managing Other People’s Money:
It’s extremely important that you be responsible with money that doesn’t belong to you.
This includes debts that you owe, such as your credit cards. It should be a priority for us to get those paid off as soon as possible.
When economies crash, it’s those with unpayable debts that lose everything, and those with a little extra cash on the side who come out much better then they were before.
Create a jar or fund dedicated to paying off your debts… a suggested amount for this method is 10% of your income.
Jar 2 – Generosity & Giving, the Anti-Scrooge:
Giving is an extremely important part of life.
It can have several health and mental benefits, such as feeling good about yourself, being happier, and feeling more detached from materialism.
It can make someone else’s life a little better (perhaps someone who’s much less fortunate then yourself), and selfishly speaking, what you sow you shall reap.
Generosity tends to come back to you.
One of many ways we can be generous is with our finances.
Think about setting aside 5% – 10% of your income as a generosity fund.
Jar 3 – Saving For A Rainy Day:
Saving money is an obvious, but surprisingly a lot of people either fail to do this or don’t believe that they can.
Just try setting aside 10% of your income, save it, don’t spend it.
You might have to make some sacrifices, maybe a little less coffee, or a little less smoking, or a little less of something else that may be slowly sucking up your access cash.
You could give up your cable and do something more productive or educational instead.
At any rate, by saving you’ll be able to make larger purchases in cash later on, or have money set aside in case of an emergency or an unexpected expense.
You can even use this to purchase monthly groceries in cash instead of with credit… you might be surprised how much money that will save you.
Jar 4 – Investing :
Saving isn’t enough to make you rich…you’ll never save your way to wealth.
That’s why your investing jar is a critical part of your wealth management.
Jar 5 – Spending Time… Finally:
Many people make this their first and only jar… that’s a big mistake.
Take care of your priorities and responsibilities first, then enjoy your spending with more ease of mind.
The bottom line:
Now obviously everyone’s situation is different, and I’m not suggesting you follow this method to the ‘T’.
For your particular situation, you may have to give more or less in a particular jar that’s not as much of a priority, perhaps just for a time.
And of course your financial decisions are in your own hands.
But I do hope that the lessons from this infographic were of some benefit to you.
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