To start investing, you need cash. And to get cash, you need a budgeting strategy that makes it as easy as possible to stash your cash away. Enter the three pots saving method.
Let’s face it, saving can be tricky, especially when there are so many other financial demands in life – your rent or mortgage, your mobile phone bill, food, beers and cocktails, Netflix, Spotify, romantic dinners, petrol, insurance, holidays, the list goes on. The good news is that it is STILL possible to invest without breaking your budget and living on 2-minute noodles. All it takes is a decent savings method.
If you get into a good habit early and stick with it, you’ll get there. Three pots saving is one of the easiest ways to save around. Here’s how it works.
The three pots saving method
A basic principle to help you organise your money is to break it into three different ‘pots’ every time you’re paid.
These pots could be three separate bank accounts, or you could just keep track of them using a budgeting app on your phone or excel spreadsheet. Whatever works for you.
Your three pots should be split as follows:
1. Living expenses
The first pot is where you put all of your living expenses.
Once you’ve worked out how much you need to set aside each pay, you put things like rent, mobile phone bill, gas and electricity, insurance, transport into this account. Leave any excess in there each month as well, because it’s always handy having additional in you ‘living expenses’ pot to account for the unexpected.
This account is for your food and for spending on whatever you like.
Nights out, movies, presents, clothing, whatever floats your boat. But try to make sure you limit yourself to that amount.
It’s this pot that causes people the most trouble – they overspend and then take money from their other pots so they can keep spending. Act your WAGE!
The trick with this pot is to make sure you account for everything. Don’t try and kid yourself and think you can go for a fortnight on $100. A social life costs what it costs.
So, be accommodating when you’re planning how much goes into this pot, and then stick to your plan. It’s better to have excess in this pot than to find yourself regularly taking money from your other pots.
The third pot is the juicy one. This is where you can make some money.
The last third or so of your pay should be put into a savings account that you don’t touch. This account can be used for saving for anything – a holiday, a car, the new console, or stocks!
Put your money in and leave it, until you reach your goal. Once again, it doesn’t have to be exactly a third that hits this pot, but the main thing is that you decide on an amount that works and stick to it. It’s surprising how good it feels watching that bank account rise each week!
Saving can be that simple
The message of the three pots saving method is simple: three main spending pots – one to keep your life going, one to have fun with, and one to invest with.
Give three pots saving a try and see how you go.
If you find you’re not sticking with the amounts you allocated to each pot, you can adjust the amounts, or maybe find a fresh saving method to try.
Don’t give up on saving entirely just because three pots doesn’t work to you. There are plenty more strategies out there and one will definitely get to your goal. The trick is to find the one you can stick to without too much effort.
With a bit of luck, the three pots saving method will be an effortless strategy for you.
This is an edited version of a post that originally appeared on Equity Mates. It is republished here with permission.