Personal Finance (Sec. 4.5)

Fundamentals of Finance by Adam J. McKee

SECTION 4.5:  Your Mad Money

This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.

Open Education Resource--Quality Master Source License

It has often been said that life is a journey, not a destination.  Nowhere in this little book do I want to imply that you should emulate Ebenezer Scrooge and live a miserable life.  I wholeheartedly believe that you should enjoy life, especially if you are in the helping professions and your professional life shows you the worst that humanity has to offer on a regular basis.  In fact, the very reason that I wrote this book is that I want you to be financially independent, and not stress and worry over how to pay the bills.  Helping professionals get enough stress at work; you want your home to be a sanctuary from a hectic and stressful professional life, not a gloomy place full of unpaid bills and doubts about the future.

I want you to have fun, but I want you to do it in a reasoned way such that a little fun doesn’t lead to a lot of stress later when the bills pile up.  I suggest that you dedicate a proportion of your income to what my mother called “mad money” or what We’ll call your “fun fund.”  In short, your fun fund must be funded, just like paying your recurring bills and saving for emergencies and retirement.  You get to do fun stuff, but you have to be reasonable about it and weigh the pros and cons of different options.

I also suggest that you add small windfalls of cash to your personal fun account.  You’ll need to discuss this at length if there is a significant other in your life that you share a budget with.  Big windfalls, of course, should be invested.  If your Rich Uncle Bob passed away and left you $50,000, that should be invested!  If you get a $50 “safe driving bonus” from your automobile insurance company, then that is fair game for the fun account.

As Dave Ramsey tells us, if you don’t budget some money for fun, you’ll end up spending it anyway, and blow your carefully crafted budget.  Mr. Ramsey calls this “pocket money” and says that it is different than other budget items:  this is money that you are free to spend however and whenever you want.  The key is moderation; he cautions readers to “Just make sure you’re not spoiling yourself rotten and abandoning your long-term goals in the process.”

Another important aspect of “Mad Money” is investing in what Jim Cramer calls “speculative” stocks.  These are the companies that provide too much risk for your retirement account but just may make you rich if they work.  In Real Money, Mr. Cramer advises that you invest a small part of your “discretionary portfolio” in these types of stock.  The reason is simple:  Everyone who has ever heard of the stellar rise of companies like Google and Apple wishes that they got in at the start.  As he points out, “the biggest return generators of our life, the Home Depots, the Best Buys, the Comcasts, were incredibly risky, if not considered outright dangerous, just when you had to buy them aggressively.”


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