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 method of investing 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) for 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 like 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 favorable 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 bucketing.
Once your investments are aligned with your goals, you will be able to get good returns.
Example to understand the cookie jar method of investing
Consider that you have these three goals
- First, to buy a costly smartphone this year
- Second, to buy a car worth 4 lakhs 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.
How to use the cookie jar method for investing?
Similar to how budgeting works, for saving too, you should ideally create jars for separate objectives. For example – Emergency Fund, Wedding Fund, Children’s Education Fund, Retirement Fund, etc.
1. Emergency fund
It is meant for any unforeseen situation that may arise. The Thumb rule says it is good to have three months of expenses as an emergency fund for your rainy days.
This money should be in liquid or fixed deposits and safe from volatility.
2. Retirement fund
Plan for your retirement when you start earning. You will thank us later. If you start at 25 and assume you have 35 years ahead of you to work before retiring, a small monthly contribution can help you save big.
But if you start late, the monthly contribution for the same amount will be exorbitantly high.
| Goal | 10 Cr | 10 Cr |
| Tenure | 35 yrs | 20 yrs |
| SIP/month | Rs 6,750 | Rs 67,500 |
| Returns | 15% | 15% |
Similarly, it would help if you planned for other goals such as a car, house, child’s education, child’s marriage, holiday, etc.
These can become your separate jar and would be dedicated to that specific goal.
FAQs
What is the cookie jar approach to investing?
The cookie jar investing method allows you to pour your savings and investments into different areas (called jars) for specific purposes.
How do you use cookie jars?
Consider you have a goal of buying a car in the next 5 years. 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. This approach to investing is called cookie jars when you see each goal differently.
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.
What financial goals can you use the cookie jar investing approach?
You can use it for long-term and short-term goals. Whether it’s buying a car or financing your child’s education, you can have a separate jar and investing approach based on how much you need, when you need it, and your risk profile.
Need help planning and saving towards your child’s education?
Consult an expert advisor to get the right plan
