This is a guest post from Steve Martile, a life coach and the author of the personal-growth blog Freedom Education. Here he describes a budgeting system that actually reminds me of Elizabeth Warren’s balanced money formula, but with a little more detail.

Managing money doesn’t restrict freedom — it creates freedom.

That’s probably not the first time you’ve heard this. If you want to create financial abundance, you’ve got to start managing your money. I started doing so in 2006 after reading T. Harv Eker’s Secrets of the Millionaire Mind [J.D.'s review].

Before then, my wife and I were pretty random with our spending habits. We ran a pretty high tab every month and had nothing to show for it. At the time I was driving a brand new Nissan 350Z, which cost me an $800 payment each month. That didn’t include insurance or gas; that was just the payment on the car.

The JARS Money Management System
Then we started using the JARS money management system discussed in Secrets of the Millionaire Mind. What are the JARS? The JARS are just that: plastic jars. Here’s a photo of my jars from my home office:

The jars themselves aren’t actually that important. What’s more important is the money management system behind them. We actually bought the JARS as a visual reminder of where to put our money when we manage it. But we manage it from a set of bank accounts.

Managing your money reaps rewards
Once we started to manage our money, I sold the 350Z. After our first year, without any significant change in our income and all expenses being treated equal, our net worth increased by a surprising 45%. When we learned how to apply this system we realized it was very simple and it didn’t require a lot of our time.

Here are the results we produced after using the JARS for 12 months:

  • Our net worth increased by 45%.
  • We bought our first home for $337,000.
  • We created $800/month in passive income by renting out our one-bedroom basement apartment.
  • We earned $200 in interest from our savings accounts. We use ING Direct savings accounts, which were clocking at about 3.5% interest at the time.
  • We created more peace in our relationship because my wife and I have our own “play” money.

The real trick to managing your money is not what you do — it’s how you do it.

How to use the JARS system
Here are the jars and a short description of each one.

  • Necessity account (NEC - 55%): This account is for managing your everyday expenses and bills. This would include things like your rent, mortgage, utilities, bills, taxes, food, clothes, etc. Basically it includes anything that you need to live, the necessities.

  • Financial freedom account (FFA - 10%): This is your golden goose. This jar is your ticket to financial freedom. The money that you put into this jar is used for investments and building your passive income streams. You never spend this money. The only time you would spend this money is once you become financially free. Even then you would only spend the returns on your investment. Never spend the principal.

  • Education account (EDU - 10%): Money in this jar is meant to further your education and personal growth. An investment in yourself is a great way to use your money. You are your most valuable asset. Never forget this. I have used education money to purchase books, CD’s, courses or anything else that has educational value.

  • Long-term saving for spending account (LTSS - 10%): The money in this jar is for the bigger nice to have purchases. My wife and I have used the money from this account to go skiing in The Rockies in Whistler, BC. We also used this money last September for our trip to Italy and Switzerland. The only reason we’ve been able to make this happen is because we’ve accumulated a nice sum each month in our LTSS. A small monthly contribution can go a long way.

  • Play account (PLAY - 10%): This is my favorite account. PLAY money is spent every month on purchases you wouldn’t normally make. The purpose of this jar is to nurture yourself. You could purchase an expensive bottle of wine at dinner, get a massage or go on a weekend getaway. Play can be anything your heart desires. My wife and I each receive our own play money, and here’s the best part. We’re not allowed to ask what the other person spends their money on.

  • Give Account (GIVE - 5%): The money in this account is for giving away. Trisha and I give money every month to the Sick Kids Hospital Foundation. We also use the money in this jar to give to family and friends on birthdays, special occasions and holidays. You can also give away your time as opposed to giving away money. You could house sit for a neighbor, take a friends dog for a walk or volunteer in your community.

How the JARS work
Here is a sketch of how we use the jars. Actually, we don’t use jars at all. All of our accounts are electronic savings accounts with our necessity (NEC) account being the only exception; it’s a checking account. Trisha and I deposit all of our personal income into our necessity account. The money in our necessity account pays for all of our expenses. The remaining money is distributed into five other accounts.

I learned very early in the process that the jar percentages are not critical. To guarantee your financial success, just start using the system and build the habit. This is the key. It doesn’t have to be perfect when you start.

You could even start by splitting $10 every month into the jars. There’s an inspiring story in Secrets of the Millionaire Mind. One woman started splitting $1 into the jars every month. In her first month, she put 10 cents into her PLAY, 10 cents into her FFA, 10 cents into her LTSS, and so on. Later that month she used her play money to buy a piece of bumble gum. She received a mini comic with the bubble gum package that she bought with her play. She read the comic and got a laugh. Two years later she deposited a $10,000 dollar check into her FFA account. Now who’s laughing?

I highly recommend the JARS system to anyone who wants to make the most out of their money. If you’re looking for a simple way to budget, then start using the JARS system. Remember: Managing money doesn’t restrict freedom — it creates freedom.

You can read more from Martile at his personal-growth blog Freedom Education. He has also written a free e-book entitled The Genius Within YOU.