[social_warfare]

Last week, I talked about how to implement the zero-based budget system by using Cash Jars. Cash Jars were popularized in Canada by Gail Vaz Oxalade.   I allocate my paycheck into categories represented by “jars”. The zero-based budget accounts for every dollar.  After budgeting and putting the cash in the jars, you are strictly on a cash budget until the next pay.  I did this for 4 months and this is the result.

I would love to say that Cash Jars were a resounding success.  There were so many advantages to it; flexibility, instant feedback, paying yourself first.  But it was a disaster for me. Reality doesn’t always live up to the idea.  I ended up overspending instead of saving. After the 4 month trial period, not only had I not saved as much I hoped, I had a negative balance! How on earth did this happen? Still, I had faith in the premise.  I realized I had customized the method to my goals, but not to my lifestyle.  With that in mind, I analyzed how it could be optimized for the way we live today.

After I took some time to lick my wounds, I faced my failure and I analyzed where I was going astray.  I found these pitfalls:

Cash is inconvenient:

Most of us are paid via direct deposit or otherwise electronically. So every payday, I had to withdrawal a lot of cash in specific denominations to put in these jars.  As Canadians, we also have a lot of coins.  For every cash transaction, I got back lots of change.  That was a lot of weight to be rattling around in my bag. And because leftover allowance rolled into the next period, I ended up with jars of change and I didn’t really know how much was in there.  It became burdensome to take out $12 from the eating out jar because it was all in coins. So, I ended up using my debit or credit card out of convenience.

It’s time-consuming:

Speaking of convenience, these jars are not on-hand. The inconvenience of the jars, which I know is a feature, is to discourage impulse purchases. But we lead busy lives, we have heavy demands on our time and it is a precious resource.  For example, I remember to pick up something in my “Life” category on my way to fill up the tank because it’s “on the way”.  But I had only taken enough out of the “transportation” jar. Now I had to make two trips. I’ve had a long day, traffic is bad and I’m starved.  Under these circumstances, it’s too easy to whip out the credit card for that ‘small’ Life purchase.  I justified it by thinking I’ll take the cash out of the jar when I get home.  But what happens? I forget!

Commingling

Another pitfall with physical cash jars is longer-term expenses are comingled with weekly/monthly expenses.  For example, as part of the “housing jar,” I put in $50/pay for property taxes and insurance.  But because those are not paid monthly, it was easy to forget that this cash was earmarked.  This was especially true after the first month.  When another “household” expense came up, I looked at the jar and thought I had the budget for it.  Unfortunately, when that property tax bill came due, I ended up short on funds.

Solution:

After analyzing what drawbacks I experience, I saw an obvious solution.  I switched physical jars for digital jars in the form of online bank accounts.  Now I actually have 9 bank accounts. I still have all the same categories like “clothes”, “travel” and “entertainment”, but I have also set up separate accounts for those future expenses like taxes and insurance.  Since those are not comingled with the main “household” account, I don’t risk spending it on the wrong thing.

This set up is also more convenient for me.  I don’t have to make trips to the ATM to withdraw cash on payday. With online banking platforms, you can set up automatic transfers for future dates. Using this, I schedule transfers into each separate bank account on payday. A series of automatic transfers deposit the correct amounts into each digital jar on that day. I set this up one-time and from there everything is automatic.

Usually, I leave the food, entertainment and other “Life” amounts in my day-to-day account linked to my debit card.  Now when I have to spend $12 on eating out, I don’t have to count any coins.  I use my card and it takes it from the correct “jar”.   As a result, it takes no effort to stay on budget. In fact, it takes an effort to break the budget as I have to take the extra step of transferring money from a savings account back into my spending account. It actually saves me time.

I retain all the benefits of the Cash Jar system, I pay myself first and my deposits into savings and investments are not based on my memory or subject to my whims. Since my online banking platform lets me “nickname” the accounts, I know what “jar” each account represents. I still have the at-a-glance visual cue to know how I’m doing for the month.  As with the physical jars, having multiple bank accounts offers the same amount of customization.  I still have “jars” that are important to me that may not be relevant to another budgeter.

I’m happy to report that after tweaking the cash jars into digital accounts, I have been on budget.  That was over 2 years ago and I haven’t looked back.

So after this case study, are you willing to try it for yourself?