When it comes to personal finances, I notice that most people are way too focused on increasing the return rate on their invested capital, while they remain reckless with personal spending.

Think about this: do you think it’s easier to beat the market through investing and producing consistently higher returns, or is it easier to take a few steps just to have more self-discipline than the average person and better control your spending?

I see tons of seminars about options, value investing, real estate, trading and even bitcoin (until a while ago) selling very well on the market, which means that people are looking for ways to get higher returns from their investment accounts, often hoping for a silver bullet. While trying to maximize your returns is a legitimate – although much harder than you’d think – kind of pursuit, there is little point in looking only at this side of the equation when you’re struggling with saving. In this case, your money issues lie at the source.

Even if your returns are average, with a solid saving gameplan, in the long run, you’ll get wealthy. As I shared in this post about the compounding effect, once you stretch the time horizon, wealth literally explodes, if only you’re consistent with your savings.

How to save more? You need 2 essential tools

So why is it so complicated to save money? The solution is counterintuitive because you’d think saving is a discipline problem, when in fact it’s a strategy problem.

Whenever I talk with people who claim to spend all their paycheck by the end of the month and not having the savings they’d want by the end of the year, 9 times out of 10, what I soon discover by their own admission is that they never really set a saving goal for themselves and tracked their spending.

It’s as simple as that. Most people who don’t save enough money, simply don’t have a strategy and a personal budgeting tool.

So, in this post I want to share my experience with using:

1) A money management system: how much you should spend in each area of life

2) A tracking tool: budgeting and staying on track with your daily expenses

If you want to increase your savings, you must have these two tools in place. There are several options for each and I’m going to share with you an effective example of money allocation and tracking tool.

Money management system

First let’s talk about the money management system. A lot of people have little idea about how much they should spend in each area of life and this is the beginning of trouble. Whatever philosophy you follow, it’s important that you adopt a systematic approach, or there’s no discipline that can save you when your target is undefined.

A good starting point is T.Harv Eker’s so called Jar system. The idea is to split up your monthly income into six separate accounts, or jars. This is the original allocation according to his system:

Necessities: 55%

This includes your rent, food, transportation, everything you need to live your life

Long-Term Savings: 10%

This account you keep invested (funds, stocks, bonds and other relatively ‘liquid’ assets) and it’s otherwise called your rainy day fund. The idea is that you’re eventually going to spend it, but only for things that truly matter (e.g. unexpected expenses, medical, new car, etc.) and usually after a relatively long time

Financial Freedom Account: 10%

 This portion is different from your Long-Term Savings. In fact, the idea behind this account is that you’re never going to spend it. This account is supposed to generate passive income, so you can only spend the proceeds and interests that you generate (or re-invest them)

Play: 10%

This is money that you’re supposed to splurge. Have fun with it. Buy a nice dinner, book a 5-star hotel. The idea is that – if by the end of the month you haven’t spent it yet – you have to go out and spend it on something regardless. You must have fun with it. This 10% is supposed to give you the feeling of freedom and wealth, so you must learn to spend it without guilt or shame. And in fact, if you apply the system methodically, there is no room for guilt, because you know that everything is already in check, so now you can go on a totally guilt-free shopping spree

Education: 10%

 This is money that you invest in yourself and your growth: mentoring, courses, books, programs, certifications, etc.

Donations: 5%

 This is the portion of your income that you donate, give to charity and use to make other people’s lives better.

How to save more money: a few tweaks

Personally, I enjoy the 6-jar system’s philosophy overall, in particular its emphasis on educational spending as well as the approach to play and to incorporating it into a disciplined system. I tend to follow the percentage distribution, with a few tweaks.

Depending on your income levels (as well as other factors such as your age and life goals), things may vary a lot. But here are a few general exceptions I apply to the system, that I feel anyone could benefit from.

First off, I try to keep my rent as low as I can. Because that’s a fixed portion of my income deducted every month, I rather keep it low and increase my disposable income which I can allocate differently depending on my life circumstances in any given month.

A popular rule for rent is to spend no more than 30%. It is highly contested, especially these days when finding reasonably-priced accommodations in cities like New York, Hong Kong, London, San Francisco, Tokyo has become as daunting as searching for a needle in a haystack.

However, I’d recommend taking all the time you need, but finding a way to secure a place around that figure, at least below 35%. Occasionally I’ve managed to bring my rent down to 20% of my income. Although I could have definitely upgraded, I still decided that I’d enjoy the freedom of spending extra in leisure or save more to build a better future down the line.

There may be limits to how much you can lower your rent, but I’d try every possible avenue before admitting defeat, because here’s where you can extract a lot of saving. I’ve seen people happily taking up a nice flat in a condo for 40 to 60% of their income. Which is simply nuts as a long-term strategy. They may expect to be promoted at some point, but that’s not how you play this game, you must be disciplined from the beginning. In addition, there are multiple ways in which you can decrease you living expenses, simply by becoming more conscious of your lifestyle

(Also read: How Meditation Can Reduce Your Living Expenses)

Another tweak I use is in the education jar. Although education is super important and you should indeed prioritize it as a domain of life you’re heavily invested in (not just financially but personally), I feel that these days there are endless opportunities for online learning and self-education that virtually cost zero dollars. So, if you want to save some extra money, without missing out on your growth, this is a bucket where you may have some leeway, potentially bringing it down to 5%.

Donation at 5% also is very nice, but percentages really don’t account for one’s life circumstances. If you earn 500k dollars per month, probably you can even donate 50% without seeing your luxurious lifestyle severely affected. If you earn 1,000$, then even those 50$ might make a difference to you. I still believe that donating is not only a good deed but a great training for your mindset regardless of your income. So even if your income is low and you feel the pull to donate a 10%, I’m not going to hold you back. General advice sets this at about 3-5% of one’s income. Depending on different tax benefits you may obtain, you can work with it. I’d also agree that anything above 3% is good.

So, that’s about the money management system. Whether you decide to use this one or a different framework, the point is: you must have an overall gameplan for where your money is going to go and what your saving target is by the end of the year.

Track by the day, not by the month!

If the money management system is the strategy, the tracking tool is the tactics. One of the reasons why it’s so difficult to stay on course with saving money is because our brain doesn’t have the capacity to keep track of the tens of little (and not so little) expenses we incur during the day.

That’s why I felt that using a monthly budget didn’t work for me. I needed to get down to the details of my daily spending and then aggregate them into my monthly budget to really keep things in check.

In order to do so, I’ve created a spreadsheet where I started inputting my estimates for different categories such as: lunch, dinner, groceries, personal care, drinks/social life, transportation etc.

I input the expected spending for each day of the week.

For example: Monday I will put 10$ lunch because that’s about the price I spend for a salad and a drink near the office and maybe no dinner expense because I’m eating at home (so it goes into groceries already). On Wednesday I will put 30$ for dinner, because I’m assuming that at least one weekday I’ll eat outside. On weekend I will put – for example – 50$ for dinner, 20$ for transportation and another 80$ for entertainment, assuming I’ll go for dinner, take a cab, have drinks, either on Friday or Saturday.

Now let’s say that that I usually take a short trip once a month to a nearby island and pay for ferry, hotel and the rest. Imagine ti costs me 400$. I will still factor it weekly: I’ll put 100$ in my Sunday entertainment budget (as it’s a monthly trip, it becomes a 100$ average per week).

Once I’ve done that, I’ll take a few weeks to monitor my expenses and adjust my spreadsheet. I start replacing my estimations with real-life daily expenses and see how realistic they were. Eventually I have a good gauge of where I’m spending the money and if I’m off target, that’s where I zero in and figure out where my extra savings can be squeezed from: should I take the bus more often instead of Uber? Start eating at home one more day every week? I can decide exactly where my extra 100 or 200$ can come from.

The nice thing about this system is that you only need to use the spreadsheet for a few months. After that, if you’re doing this right, you get to the point where you naturally have a feel for how much you’re spending. Nowadays I don’t use it anymore. After I got my saving goals met and exceeded, and also increased my income, I know that my spending habits are naturally lower than the budget. When I’m going above, I have a natural feel of how far above I am, without needing to check against a spreadsheet anymore. And from there, in the following week I can naturally adjust.

Overall I don’t think I even need to adjust intentionally anymore, because it’s just part of my lifestyle. As my lifestyle is in balance at this time, so are my expenses. If one week I go out too much, the next week I’m just naturally drawn to being home and meditating, and so the money tends to average out as well.

The way I’ve reached this point was by using the tracking tool and getting familiar with it first though. First you get the discipline and then you get the freedom.

I believe the tracking tool is also particularly beneficial whenever you’re facing major lifestyle changes, for example moving to a different city where the cost of living and your habits are still somehow unclear. Or when you’re transitioning into a different stage of life, such as having a baby with all the associated expenses and shifted priorities etc.

In conclusion, increasing your monthly savings is just two steps away. With two easy tools in place, you can change your habits and the figures in your bank account. So start right now: calculate the amount in your jars and create your daily expenses tracking tool.

Also published on Medium.