The Power of "Mad Money"

Do you notice your monthly checking and savings account balance trending downward month after month?

If so, you probably have a spending problem.

"But where does it go?" you may ask. After all, like a lot of people these days, you probably pay most, if not all of your bills online. And apart from some seasonal fluctuations in your utilities, your monthly expenses are pretty much the same.

So why doesn't the balance in your bank account increase?

If you are like me (or most people), you probably don't carry around a check ledger and record every single transaction. You spend pretty freely, guessing how much money you have in the bank on any given day, and primarily rely on periodic balance updates or warnings that get sent electronically to your e-mail or phone to alert you of any extreme transgressions.

And as a result, it is only towards the end of the month when you realize that you overspent.

The truth is (of which there is a lot of research to back up), if you use your ATM/debit card to make all of your purchases, you will tend to underestimate how much you actually spend compared to how much you truly spend. Using your ATM/debit card, you feel wealthier than you actually are, and you tend to spend more freely.

If you are trying to live off a budget (as we all should), then this is a REALLY bad method of controlling your personal finances. For example, let's say that you allow yourself $300 a month in "discretionary spending" on things such as shopping, eating out, going to Starbucks, date money, and entertainment. The chances are, if you rely on your ATM/debit card for the bulk of these purchases, you are probably going to blow your discretionary spending fund.

Don't feel bad, such is simply how human nature responds to plastic bank cards.

Being recently married, I found out that two people jointly using this method of personal finance tends to have a "multiplier effect," and it makes it all the more clear that this is a really bad way to manage finances. For example, on Friday I might go out to lunch with the guys at work, and on my wife's way home, she might swing by Target for an item or two. Then I might swing by Redbox, pick up a movie, order a pizza, and settle in for a lazy Friday evening.

But, before you know it, we've spent $100! Yet, each of us feels like we have only spent half of that. And we are only talking about how we handled our finances for one Friday out of the month. We still have the rest of the month ahead of us, in which we will likely repeat a similar pattern of destructive financial behavior!

Just imagine how well that plays out in the long run. It's a great way to become broke... and fast!

But, imagine how it could be better. Putting our heads together, my wife and I implemented a new strategy for controlling our monthly expenses.

Now, instead of using our ATM/debit card for our discretionary spending, we take out some cash at the start of every month, divide it between the two of us, and we call that our "MAD MONEY."

Under our new system, we take our monthly "mad money" and use it for all of our discretionary spending. Once we run out of the cash we took out, that's it... no more mad money to spend. When my wallet is empty, my hands are tied and I no longer have anything to freely spend. If I want to buy anything else, I need to ask my wife to borrower some of her "mad money," and vice versa.

The end result of our little experiment has been that since we've implemented our "mad money" system, every single month we've seen our bank balance increase.

And while we have not completely eliminated using our ATM/debit card in our discretionary spending category, that's ok. We've made significant progress in this arena, our behaviors are changing, our savings are growing, and we are going in the right direction.

Remember: Personal finance is a journey, not a destination.

I believe that simply keeping cash on hand will change not only the way you spend your money, but how much you spend, and help you grow your bank account balance in the process! Try it out, and let me know how it works. See if it won't make a difference.