Even the youngest of people can learn to budget by using the simple system of give, save, and spend. It’s similar to the 50/30/20 rule where you place items in certain categories to determine where and how you’re spending your money.
To be able to learn how to manage money, children and everyone first must have money to manage. This money can come from a job, babysitting, allowances, birthday money, or even a lemonade stand. Once an incoming source of money is achieved, it’s now time to figure out how the money gets divided. One of the most simple and basic tactics is give, save, spend. Sometimes this is also called the 3-jar method. This is an optimal path to budgeting and helps even the youngest of users how to use and manage money. Letting younger children direct where they want to put their money will let them play an active role in their finances and set them up to be successful with money in the future. If you are a parent, it’s also important that you lead by example with being smart with your own finances. This is not the time to do, “Do as I say, not as I do.”
In most financial discussions, people talk about paying off debt, saving, spending less, retirement, etc. What I find absent from many of these conversations is the “give” component of the Give/Save/Spend equation. People know how important it is to spend. Without spending, we wouldn’t eat nor have a place to live. Also well understood is saving. It might be for a new car, your retirement, or just the great pair of shoes you’ve had your eyes on. Giving may be the most important of all.
Give:
Thinking about others is a true virtue that everyone should espouse. There are so many benefits, both mental and physical, that happen as a side effect of giving. Per the Cleveland Clinic, there is an actual chemical response that takes place in your body when you’re doing good for others. Seratonin (regulates mood), Dopamine (gives you a sense of pleasure), and Oxytocin (creates a sense of connection with others) are secreted by the brain during the process of giving.
There are other benefits as well. Lower blood pressure, which tells you that generosity is good for your heart. Some research reveals that generosity can be just as important as a healthy diet and exercise. A longer lifespan may also be a side effect of helping others. Studies show that people who volunteer live longer than those who don’t. Being less stressed is another benefit of giving to others. Gift giving and volunteering can help reduce your cortisol levels. This is your stress hormone that can make you feel overwhelmed or anxious. What’s especially interesting is a “helper’s high”. It states that giving can stimulate your brain’s mesolimbic pathway releasing endorphins that can lead to boosted self-esteem, elevated happiness, and combat feelings of depression. How can you beat those perks?
These are all amazing reasons to give to others. The giving jar encourages budgeters to think of others. Seeing how their generosity impacts others can make them lifelong givers. How should you determine where to give? There are endless options. Finding an organization, charity, or even special friend that could benefit from a financial blessing. To help engage with this jar, do some research and discover a cause that speaks to you personally. The luxury is that you can choose something near and dear to your heart. Examples may include a family that lost their home in a fire, the local animal shelter, or even a larger organization like the Red Cross.
Save
Saving is the cornerstone of building wealth and a crucial aspect of your financial fitness. Growing savings helps to teach delayed gratification and resisting impulses. Understanding the importance of financial growth over time leads to slow and steady growth and freedom. Savings can help with many things that are beneficial. The bottom line with savings is that it can help you explore opportunities outside of simple necessities. You may even want to create different segments within savings. Examples include emergency funds, dream vacation, retirement, etc.
Emergencies
What happens when an emergency has you blindsided with a large expense? Without savings, you can go into debt and it could cause additional problems in the future. You definitely want to be prepared for a job loss, medical expense or car accident. It can also give you peace of mind knowing that you have money there to help.
Goals
What future goals do you have? Nice car, home, overseas vacation, retirement, college fund. All of that costs money. Also, none of those are something that you can pay out of pocket for. The sooner you start saving for your goals, the sooner you’ll get there.
Tax Advantages
Contributing to your company sponsored retirement plan can reduce your tax liability because it’s taken from your paycheck prior to taxation. A Roth IRA is where the money is taxed prior to deposit so that means that the money grows tax free, and you don’t have to pay taxes upon withdrawal.
How to Separate
Once you are familiar with the three different jars, how do you determine how much to put in each? Though there may not be a hard and fast rule for exactly how much for each, knowing what things are important is crucial to your success. The amount that you use for each jar can and should be adjusted over time when learning how to spend less. A good starting point is 55% for spending, 30% for saving, and 15% for giving. You know you’re making progress when you can reduce the 55% and increase the 30% numbers. Good luck getting started on your way.
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