Most people have a tendency to live month to month, especially as students. It is only when we realise how much we can gain from saving up longterm, that we alter our short-term satisfaction behaviour. In this video I break down a trick I use to make sure I keep an eye on my longterm goal of becoming financially free. It is not a cookie cutter strategy, as we all have different priorities in life, but keeping an eye on your different ”jars” will probably give you a good perspective on your financial health.
Now, lets get into this blog post:
I remember when I finished high school and I moved out of my parent’s house because I was going to go to university. It was the first time I had to start paying for all of my expenses myself. Before I moved out of my parents house, I only paid for my phone bill and things like going to the movies with friends, etc.
When I moved out I was eligible for a student loan, and I had a job on the side so I could pay for healthcare, my tuition fee, rent, utilities, my phone, food, and going out. I chose to study in a city that is well-known for its massive student culture. This meant housing was cheap, going out was cheap and overall I would pay less than if I chose to study in my home town. This however, also meant that there was a lot to spend money on as a freshman.
I had enough money from my student loan to cover all of my expenses. But, because I never really had to manage my own money, I made the mistake of never budgeting what I needed to spend on all of my necessities and what I had left to spend on parties, shopping and eating out. So I kept spending money until my money ran out. I remember when that first monthly payment was made to my account. I had never had such a large sum of money in my bank account. And it only took me two weeks to run out of money completely. I did pay for my utilities and rent, but I also paid for eating out, having beers, buying clothes, and two weeks in that was it. My balance was zero!
This is basically how I lived for a long time. I think the first two years that I was in university, I was always broke and everyone around me was living on cheap cereal and toasted sandwiches, just like me. So I did not really care, I thought that frantically looking for coins under the couch cushions to buy bread is what all students did! But when I started learning more about financial freedom and all the opportunities that can come with it I started thinking how I could change what I was doing.
How could I possibly start saving money if I got a sum of money that in principal covers everything each month, but I could easily spend in only two weeks? It felt like money was controlling me, instead of me controlling the money. And additionally, as a student, you have the perspective of getting a decently paid job after an x amount of years, so it is easy to wait and live month to month until you get a real job.
But the principle of saving money is a funny thing. Before going to university, I was making a tenth of what I was receiving every month in university. And I never felt like I had enough money. In university I got way more money, but felt even more scarcity in funds. Even though I had more money left after paying for my expenses in uni, compared to when I still lived at home. So if I got a job that pays better after university, I exert the same behaviour and end up spending more still. I would probably move out of my student house into a more expensive house, and I will make the same excuse of not being able to save over and over again. And most people live this way. The only explanation for that is that you are living beyond your means.
For some people that means that they live in a house that they actually cannot afford, others upgrade their wardrobe every month and I myself was guilty of eating out a lot. I figured I was only spending €3-5 per day, which does not sound like much. Eventually, when I started tracking my expenses, I figured out I was spending around €300/month on food. This is ridiculous for one person.
I calculated what I would save if I packed my lunch and ate out less, meaning that I spent only €160/month on food, and putting the remaining €140 in a savings account. This equates to €1680!!! That is a lot of money, especially for a student!
This is what keeps most people from becoming more financially healthy. We underestimate what saving €3-5 a day could do on a yearly basis. And I asked myself if not packing my lunch and cooking dinner for most days of the week was really worth that €1680? As a student, €1680 covers 2 extra vacations! Or a new camera, or a bunch of new lenses, or almost 6 months worth of rent?!
Then I stumbled upon the 5 jars system of money management by T Harv Ecker. The idea is that you take your monthly income and divide that over 5 jars. This will help you to see what you are spending money on and if that is in line with where you want your priorities to be. It is not about the amount of money you save, it is about forming the habit of saving, even if that means saving €1 a month.
- Necessities: 55% of your total monthly income should cover all of your monthly necessities.
- Play: 10% can go to anything you’d like. No explanation needed.
- Financial Freedom: 10% should be saved to invest. This can be the stock market, cryptocurrency, real estate or another investment which can give you a steady return (obviously this does not always go for crypto, be careful!).
- Education: 10% should go to educating yourself. The biggest key to financial freedom is educating yourself on ways to create and diversify income streams, never stop learning.
- Give: 5% can go to any form of giving. You can donate it to a charity of choice, surprise your mother with some flowers, or come up with your own way of giving.
If you would like to give this a shot, write down these numbers for your monthly income. What could you be spending from which jar? How does it measure up with what you are already spending? Setting up an excel sheet with the expenses from previous months can give you a good indication of your financial health so far.
- What if you don’t know how to invest?
Save up the money monthly until you learn more about investing. When wanting to become financially free, investing is crucial. A good book I read (my knowledge on investing before this book was zero) was Money Master the Game, by Tony Robins.
- What if you figure out you have been spending 80% of your income on necessities?
It probably means you are living beyond your means. Look for ways to reduce your expenses by cooking your own dinner, cancelling the second gym membership you are still paying for, not getting the most expensive phone plan when that new iPhone comes out, etc. are all short-term satisfactions that keep your from becoming financially healthy. Making those decisions might suck right now, but is it worth not saving €1680/year for two extra vacations? Probably not.
Lastly, go easy on yourself. When I set up an excel sheet with my expenses, I found out I was consistently spending more money than I was making each month. The only thing that kept me from going absolutely bankrupt was consistently making some money from side hustles, which I never bothered to include in my financial picture. Since then, I have had my first few months where I did not spend more than I make a month. And I must say, I am looking forward to booking that extra vacation later this year.
– Naomi Gabriel