Budgeting has been one of the most discussed topics when it comes to personal financial planning or household planning.
With the majority of the population falling in the middle-class bracket and lower-middle-class bracket, budgeting has remained a meaningful discussion.
It basically ensures that the requirement of an individual/household are met in the best manner possible, given the fact that the resources are limited.
Now coming to the topic of the blog – what is the ‘cookie jar’ method of budgeting?
Unusual name, isn’t it?
Not many would know about this budgeting method.
But no worries, in this blog, we seek to educate you about the cookie jar method of budgeting.
In simple language – cookie jar method involves cash-based accounting and aims at monitoring household spending.
Household spending, in this case, includes all expenses such as food, clothing, and travel, among others.
The way cookie jar works is that you mark your expenditure the moment you have made the expense.
You continue to spend, as long as your jar has cash in it.
The moment money is exhausted; all discretionary expenditure is stopped until the jar is re-filled with cash flow, typically on payday.
Cookie Jar budgeting is used by blue-collar workers with an aim to monitor spending between paydays and to ensure that some cash is always available in the jar to put food on the dinner table.
People, particularly the blue-collar workers, don’t have humongous savings and life is more of a hand-to-mouth situation for them.
Thus, the method helps you plan accordingly.
This method is also helpful because it enables you to see how much more money is remaining.
By way of the cookie jar method, you can always plan to save a nominal amount for future use.
After having discussed the way of budgeting, we should throw light on how to get into the habit of saving. While there are numerous methods to save, the cookie jar is also one of them.
Let us stick our discussion to the cookie jar method only.
Remember, the jar discussed here is not a spare jar and is your monthly working capital jar that helps you manage your monthly expenses.
Thus, if you seek to get your expenses under control, you need to know under which head the spend is occurring and to what extent.
Accordingly, you need to budget a limit to those overheads and restrict any extra expense.
Let us show this to you in greater detail:
Ideally, your savings ratio should be in the range of 10-15% of your income.
This saving typically varies depending on your age, earning members in a household and mouths to feed.
Now, here are the expenses.
Some of the most significant expenses are:
1. Food – This should not account for more than 10% of your monthly income
2. Housing expenses (including home loan EMI) – This should be within 30% of your income
3. Healthcare – Less than 5-10% of your monthly income
4. Education – This would include tuition fees of your children and other eligible family members. It should account for 10-15% of your income
5. Transportation – Transportation provides for fuel expense or cost of public transport that should be restricted within 5% of your cash inflow.
6. Repayment of debt –Under this category, your personal loan EMI, Car loan EMI, etc. would fall. The maximum ceiling for the head would be 15% of your income.
7. Insurance – Insurance would account for your term plan (life insurance), health insurance, etc. The budget for the head should be capped at 5% of the income.
So if you see closely, the overheads you mentioned would find that the cookie jar method helps you ensure that your household is in a sustainable condition. Apart from a check on expenses, the technique is instrumental in keeping a check that essentials are taken care of.
In the past decade, the credit availability was not prominent in India.
Thus, personal savings were the only source of funds used for any crisis.
While this may not be true, given the fact that the interest rate has improved from the past decade and, so has the process of availing credit from banks and other financial institutions, an individual should always prepare himself for the worst situation.
We believe, you should always put aside some money for the following –
The Emergency fund is meant for any crisis that may arise.
Ideally, it would help if you have three months expenses saved as an emergency fund.
Remember, your cookie jar enables you to keep aside 10-15% of income, and this should be invested in liquid assets such as fixed deposits and liquid funds.
These are safe and are readily available.
For retirement planning which may be 30-35 years away from now, you should start keeping aside some money every month from your investing/saving budget of 10-15%.
Ideally, it would help if you invest in small-cap equity funds for higher growth in over three decades time.
Under this, you should adopt the Systematic Investment Plan for equity mutual funds (large-cap funds, mid-cap funds, and balanced-funds).
These funds should enable you to meet your goals such as car, house, children’s marriage, education, holiday, etc.
To conclude, we hope you get a fair idea about the new way of budgeting.
We strongly feel not only blue-collared individuals, but every individual who is entering the job bandwagon and is mainly in his/her 20’s should adopt this approach.
Remember, if you see money in your jar, you will have money in your wallet, and then your financial dreams won’t seem difficult to achieve!