The ‘flour jar’ method of saving for a house

Can you remember the last time you paid cash for dry cleaning or even the groceries?

While few of us use cash, the reality is most people spend an average 12-18% more when they shop with plastic.

So how do we get better at managing our money so we can kick-start our property journey?

Simple – adopt the flour jar savings system of your grandparents.

What is the flour jar savings system?

We’ve made money complex when it doesn’t have to be. Money management principles haven’t changed from our grandparents’ era, but what has changed is technology.

Psychologically, the separation of time between when you spend on the credit card and when you have to pay the bill dulls the pain.  

But when your grandparents got paid, they had a different system which saw the cash they received in a yellow pay packet put into re-purposed flour jars.

In one jar they allocated their money for bills, in another they put money away for rent or the mortgage, and the third jar was for the weekly groceries. The remainder was tucked away into their savings jar for ‘luxuries’.

Here’s how you too can use this timeless approach to manage your cash in today’s world.

Flour jar 1 – The offset account (the mortgage)

Whenever you get paid, make sure it all lands in flour jar 1 which is the primary account.

This account is for salary, rent, dividends, pocket money, gifts, money you get driving for an uber – everything.

This jar is an offset account where every dollar you have parked in this jar is effectively reducing the amount of interest you are paying on your linked loan.

For example, if you owe $150,000 on your loan and you have $35,000 in the linked offset account then you are only paying interest on the difference, i.e. $115,000.

Any loans you have (mortgage, investment property, margin loans) will be automatically deducted from this jar as a direct debit on the due date.

Flour jar 2 – The debit card (living & lifestyle) 

Flour jar 2 is the living & lifestyle account and this is where you get paid your ‘weekly allowance’.

The key takeaway here is to ‘pay’ yourself into this jar by automatic payment from flour jar 1 on a Thursday to set yourself up for the weekend.

This is effectively your cash to spend on living and lifestyle.

Unlike a credit card, you are actually spending your money. If you want those movie tickets and have budgeted for them, you can pay for them online using your debit card without using credit.

If you need extra cash then you go to the ATM and take out the cash. If you do have a big weekend then you make do until Thursday by going through the pantry or fridge and seeing what you can make at home.

Warning: Whenever this jar runs out don’t use flour jar 3 – ever.

Most people will find this urge the hardest to resist. If you absolutely can’t get through until Thursday then go on internet banking and ‘consciously’ transfer more money from flour jar 1 to top up flour jar 2.

This top up is the equivalent of reaching into your wallet for more money and importantly you will process this like you would if you were actually spending cash, which will over time reduce (or ideally stop) the temptation to overspend.

Flour jar 3 – The credit card (bills)

Flour jar 3 is the bills payment account and the money in this jar is not your money.

Only use this jar to pay for things such as the mobile phone bill, internet charges or council rates.

The only reason we use this jar is we can get up to 55 days interest-free on our spending so we can have our own money parked in flour jar 1 longer. A dollar saved is a dollar earned.

A critical tip for this jar is to ensure that the balance is paid automatically each month via direct debit on the due date. Set and forget. No late fees and no interest paid. You will have budgeted for spending in this jar and there will be no surprises if you use this jar properly.

That’s it – pretty simple, right? Your grandparents would be proud and their legacy may well help you kick start your property journey.

Flour jar 4 – Future commitments (savings)

Back in our grandparents day, if they had any money left over this is the jar it would land for that ‘rainy-day’.  

If you don’t have a mortgage offset – this should be your primary ‘jar’. 

However, today you have the option to keep this jar separate or combine it with flour jar 1 because your money is working harder for you in an offset account.

That’s it – pretty simple, right? Your grandparents would be proud and their legacy may well help you kick-start your property journey.

For more from the Property Couch, visit thepropertycouch.com.au or subscribe to the Property Couch podcast, available on iTunes or Android.