Cookie Jar Method for Savings
Cookie Jar Method of Saving may sound like a funny thing; it does not have a serious or an important sounding ring to it.
As the name suggest it has its origins in the kitchen (and not in some finance class) and must have been pioneered by a woman. Despite seeming to be simple in its approach the method has it basis in the way we spend money and perceive the value of things.
Cookie Jar Method of Saving Explained
Back in old days when banking was not so accessible jars in kitchens served as an effective tool for savings and accounting. Thus different jars were marked for separate expenses and money for the corresponding expense was put in the jar with the underlying rule that the money will be spent only for what it has been reserved.
So there would be one jar for rent, one for school fees, and one for grocery and so on. This is type of demarcation of is also known as mental accounting. Mental accounting is described as the “set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities”. (Source Journal of Behavioral Decision Making, J. Behav. Dec. Making, 12: 183~206 (1999).
Mental Accounting categorizes the inflow and the various categories of outflow and their frequency. The accounting maybe evaluated monthly or yearly to review the categories, sub categories, resource allocation etc.
How Does It Help?
This saving methodology has roots in behavioral patterns and psychology. The idea is to analyze your expenses for the month and earmark them at the beginning of the month to ensure that in the middle or the end of the month you are not financially hassled.
One would definitely feel guilty in spending the money kept aside for rent on some entertainment or eating out and would try and resist from doing so.
More importantly payments for expenses like rent, utility bill etc are almost mandatory so if one has listed out and apportioned all such expenditures at the beginning of the month then you can be sure of what is available for spending on non-mandatory things like shopping at a discount sale or impromptu outings.
However it is a good idea to have a buffer for unforeseen expenditures like a car breakdown or sudden arrival of guests.
Cookie Jar is just euphuism for this method; bank accounts, envelopes, bags etc can all be used depending on the individual’s choice and motive. While cookie jar and envelopes can come in handy when apportioning your monthly expenses separate bank accounts can help you in achieving your long term goals.
If I have two long term financial objectives; first to save enough to make a down payment for a house and second to save for my child’s education. One way to go about is to save every month and fixed amount and then put in a combined savings account.
Another way is to identify the target saving for each goal keeping in mind the time frame and then apportion my savings accordingly in two separate accounts; one for the house and other for education respectively. However this requires discipline if I find a lucrative house and I am Rs. 200,000 short in my house found then I should not dip into the education fund and use the money.
The same concept has been shared in an earlier post: Saving For Children – Roadmap to Saving for Children
Here one might argue that how it makes a difference as the money belongs to the same family unit. This approach of earmarking separate accounts/jar promotes financial discipline; lets you remain more focused on your goals and let you have a clear estimate how far or how close you are to your goals. Identifying goals and chalking out a strategy is easy; sticking to it may be a little difficult.
There is research which supports that when spending is accompanied by guilt better self restraint can be exercised. This can be good method to inculcate savings habit in children too and can teach them to manage their allowances.