What is the cookie jar investing method? All you need to know
Earlier we talked about what are the top 10 best investment options in India. In this article, let’s look into what is cookie jar investing method is?
There are many rules of investing that help investors make good money. The cookie jar investing method allows you to pour your savings and investments into different areas (called jars) as per specific purposes.
The technique aims at allocating money purpose-wise for disciplined and continuous investment.
The multiple buckets of investments are earmarked for different purposes. You can consider it to be just as a child saving pennies in jars to buy their favourite toys.
What is the logic behind the cookie jar method of investing?
The Mental Accounting method’s logic is applicable here – this enables you to mentally allocate and distribute your savings into different buckets and invest accordingly. This way your expenses can also be managed efficiently as you do not spend for one goal out of the savings you collected for another goal.
When you have varied goals in life, you need to prepare for those goals in different ways with special efforts towards achieving those goals. Once these steps are taken, everything gets very simplified.
Once the goals are specified, the next step is to find which investing instruments will be favourable and for which purpose.
This needs careful consideration because the kind of instruments you invest in will determine how much returns will be generated in the future. This separation of funds for investing towards specific purposes is termed as bucketing.
Once your investments are aligned with your goals, you will be able to get good returns.
Here’s an example to help you understand the cookie jar investing method
Consider that you have these three goals:
- First, to buy a costly smartphone this year
- Second, to buy a car worth four lakh in the next five years
- Third, to pay for your child’s education after 15 years
Since it is a concise term for your first goal, you can save some cash from your salary and buy the smartphone soon.
To buy a car, you need to put the required monthly investment amount into a semi-liquid type of fund, like debt funds or even ETFs with stable returns. This will help you save enough money to buy your car after five years.
Finally, the last goal, funding your child’s education after 15 years, is a mammoth task because it actually is a more costly affair than you first imagine it to be. So you must plan this investment with utmost care and invest early and in instruments that serve this purpose well.
Need help planning and saving towards your child’s education?