Buying a second property might be a dream-like situation. Given the level of property prices in metros and large cities, a large number of people just aim to pay-off their home loan on a single property in their whole life. However, it is indeed possible to plan for a second property, provided you follow a well-thought strategy.
Studies reveal that people end up spending 10-18 percent more by using plastic money. This way, they are hardly able to meet their savings goals. Does it indicate on the need to follow some strategy that can work for you?
In this article, we will speak about one such strategy, which is tried and tested by people from across the world. It is called ‘Four Jar’ strategy. This traditional strategy used to be popular in the era before online payments and credit cards. No wonder, our grandparents were more successful in building more than one property in their lives.
Under this strategy, you are supposed to divide your financial transactions in 4 parts as below.
Flour Jar 1 – The offset account
This is the jar, which contains amount you require to pay off your existing EMIs (Equated Monthly Installments). For you, it is always a top priority. The day you get your salary, you should set aside the amount needed to settle the EMI.
In an ideal situation, you shall have a reserve of 4-6 months for this particular component. The amount of your home loan EMI should be within 35-40 percent of your total monthly income.
Flour Jar 2 – The debit card (living & lifestyle)
This jar gets the money towards your regular bills such as electricity, water, fuel, phone, internet, groceries and school fees. These are the charges which float within a specific range every month.
For instance, if your monthly income is Rs 1 lakh, then after settling the home loan EMI of let’s say Rs 35,000, your fixed expenditure on abovementioned items should be close to 25 percent of your total income.
Flour jar 3 – The credit card (bills)
This is the one which you can control. This jar has cash for your discretionary expenses. You can include all your lifestyle and entertainment expenses including shopping, movie tickets, food bills, etc.
Here you can set budgets for the items whose cost you can minimize.
Flour jar 4 – Future commitments (savings)
The money in Jar 4 comes from the savings from Jars 2 and 3. However, there is a catch. Do not make Jar 4 completely dependent on the other three jars. You should rather set aside a fixed amount of savings the moment you get your monthly income in hand.
As legendary investor and financial guru Warren Buffett says, “Don’t save what is left after spending; spend what is left after saving”. It is a golden rule.
A regular saving of 10-20 percent every month can empower you with capital that can be used to buy a second property. Let’s say, if you save Rs 15,000-20,000 a month, by the end of the year you will have around Rs 2 lakh in hand.
With the magic of compound interest at an average rate of 7 percent a year, this amount can result into a corpus of over Rs 34 lakh in a period of 10 years. Isn’t this amount sufficient to buy your second property?