There's no doubting the fact that we all view and handle money differently and that's illustrated

by the fact that there are so many different types of budgets out there to help us accomplish

roughly the same goal, to teach us what is worth spending money on and to simultaneously

make sure we're living on less than we make and that our futures are provided for.

Regardless of whether you're working with a detailed budget, a reverse budget, a percentage

budget, an automatic budget, a value or time-based budget, some sort of custom budget they're

all working towards that same goal.

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, who this budget would

be particularly good for and how it could possibly fail.

Hey everyone Daniel here and welcome to Next Level Life a channel where you can learn about

investing, debt, retirement, and many other financial topics besides, because, let’s

face it, the school's aren't going to teach it for us.

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The 6 jars budgeting method is a budget popularized by T Harv Eker and is very similar to some

of the other percentage based budgeting methods that I've covered on this channel like the

60% solution and the 50-30-20 budget.

Here's how it works:

According to Eker's blog which is the most recently updated version of this system that

I could find you take your income and split it into six different jars based on the following

percentages: 55% of your money goes towards necessities which includes things like food,

rent, electricity, and recurring bills.

10% of your money goes towards long-term savings which includes 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 fun and entertainment items

such a spoiling yourself or your family and other leisure and 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 that obviously

includes things like stocks and mutual funds, bonds, passive income vehicles such as businesses

and side hustles, real estate investing, and basically any other form of investment you

can think of so long as it helps you achieve your own financial freedom.

The final 5% of your money goes towards giving whether that is a church, charity or friend

or family member in need.

So what I really like about this particular use of the percentage based budget that I

don't remember being specifically used in other similar budgeting methods is the specific

focus on education and not just education in the go to school and get a degree sense,

although that is one of the options that is listed under this category, but it's also

the focus on self-guided education through the form of books, courses, and mentors.

I've talked about the importance of education in previous videos but it's worth restating

here because using education to give yourself specific skills that you can then apply to

the marketplace is, in the end, how we all earn a living.

It's also a crucial step in how successful side hustles are made.

For instance, say that John wanted to sell a book on how to lose weight.

What skills would he need to acquire in order to accomplish that goal?

Well, he would certainly need to be capable of writing a good book and that very well

might be a skill that he actually did learn in school.

However some other skills that most of us probably didn't learn much about in school,

unless we took some specialty classes, that John would also benefit from having include

things like copywriting, marketing whether on social media or in the more traditional

sense, how to build a strong personal brand that sells itself, how to build an audience

would certainly be very beneficial, and accounting is also always a nice skill to have.

And we could list a few others, but the point is most of us probably didn't learn many of

these skills in school.

But that's okay because any of us can read books or take courses on those subjects or

even find someone who has become successful at doing whatever skill it is we want to learn

and see if we can learn directly from them.

And as John gets more practice and learns more of these skills he'll be able to create

even better books that help people lose more weight and keep it off and as a result, he'll

probably sell more books 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 would just further improve his bottom line.

It would also require new skills such as the ability to motivate people and just good communication

in general.

So education is very important for helping us to make more money but also for helping

us to save more money.

Reading books on budgeting and frugal living can help you get ideas for ways to save more

money than you ever would have thought up on your own after all.

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 at 5% and we can debate over whether it should be more or less than

that and I'll come back to that percentage thing in a minute, but I do like the fact

that it is specifically listed as one of the things that should be in a budget.

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 a part of anyone's financial plan.

Now the things that I think we should keep in mind while using this budget is that the

percentages are to quote Eker, "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 in some of the other percentage-based

budget videos I've done in the past I've recently been getting comments saying that some of

you are skeptical on any budgeting method that puts percentages for certain categories

that everyone should follow.

And I completely understand where you're coming from with that because everyone's financial

situation is different, as Eker pointed out in the quote I just read, but I would also

like to add my own personal take on what Eker said because not only are our situations different

and not only is it possible that, say, necessities might cost us more than 55% starting out and

we'll have to work our way down towards that kind of a number over time, but our goals

and our dreamlines are also different.

What we value spending money on and getting from the money we spend is different.

So with this budget or really any percentage-based budgets when you get right down to it what

we really need to be thinking of, I believe, is what are we trying to get out of our money?

I've done a whole video on this question and I'll leave a link to it in the description

below, its on what budgeting is trying to teach us but 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 then maybe even automate our budget based on those percentages

as best we can so that we can reach our goals and live the life we want to live.

Let me give you an example of what I mean here and this is not to be a shot at Eker

or his budget I'm just using this as an example.

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, real estate,

passive income vehicles, and other Investments that are intended to help us achieve financial

freedom.

However what if one of the things that we value the most was our financial freedom?

What if we didn't have quite as many material wants as maybe some other people do but we

really wanted to have the freedom to take a two-month sabbatical whenever we wanted

to travel overseas?

That dream might be harder to accomplish, at least regularly, if we have a traditional

9 to 5 job unless of course we're able to telecommute or we have work for a really understanding

and flexible company.

Say for example that Jane earns $36,000 a year and followed the percentages suggested

by the 6 jars budgeting system.

That would mean 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.

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 investment over the long haul it will

take Jane roughly 32 years to become financially independent based on just her necessities.

If we include the rest of her spending into this calculation it would take even longer.

She's saving 10% of her income which means in one way or another she's spending (or will

be spending in the case of the long-term savings jar) about 90% of her income.

In Jane's case that would be about $32,400 a year or $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.

And that's before factoring inflation into things.

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 the percentages in that Financial freedom jar so that she

can live her dreamline earlier on in life.

If she doesn't this budget could very well fail her.

Unless of course, she takes a page out of Ekers playbook, a page that I wholeheartedly

agree with by the by, and starts to generate a passive income stream or 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 her 10% savings rate will

be more effective in terms of raw dollar value, but also, in the ideal scenario, her passive

income grows enough to fund her lifestyle without actually needing to wait the 38 plus

years.

And Jane may decide that she really wants to accelerate this process as much as possible

in which case she could go the passive income route with side hustles while working and

simultaneously increase that 10% savings rate to a larger percentage of her new income.

Say if Jane started a side hustle that allowed 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 $32,400 that she was spending before.

And since she's saving $2,000 a month she hits her $600,000 new financial freedom number

in a little under 14 years assuming that same 8% rate of return.

So who would this budget work best for?

Well, the nice thing about these percentage-based budgets is they're capable of working well

for pretty much anybody but I do think that it probably would work best if you're someone

who already has a fairly good idea of what it is they value and a fairly good idea of

where their money is going.

Because again the downsides to these percentage-based budgets is they don't have as much detail

as a zero-based budget would so it is possible to lose track of where exactly your money

is going, but this is less of a crucial issue if you are coming into the budget with your

finances relatively under control and your values surrounding money understood.

But that'll do it for me today once again if you enjoyed this video be sure to smash

that like button if you haven’t already, subscribe, and hit that Bell next to my name

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out there and start our own Financial revolution.