Mad Fund

In my time working in the financial services I have been asked for advice in a number of area. The one question I am asked by both young and old is “where do I to start.” From this simple question we can get into a number of complex discussions. So where do you start to build financial independent and peace of mind? The answer to the question is a boring but useful one. All sound financial plans must begin with a solid base. The base in this case is built on a Mad Fund.

What in the world is a Mad Fund? Yes, yes I know you want to hear of the next tech stock to make you an overnight million, but that post will need to wait. Unfortunately we must crawl before we begin day trading. Let me explain.

Today you drive over a nail on your way to work and the result is a flat tire. Obviously you need to spend money on a new tire. You think of the time and effort to change the tire as a cost to your today as well as the tire. At this point you are MAD, like most Americans you will you charge the tire to your credit card. In 30 days you get the credit card bill and you are mad again because of the high interest fees.

Most of America will pay for the expense over the next few months or years. According to Greenlight Card the average American has a credit card balance of over $7,200 and Nerdwallet list the figure at just under $16,000. Most citizen will carry this debt over 68 months and will pay for the privilege of using the card with an additional $2,000 of interest (vacu.org).

How can you avoid this revolving debt from eating away at your long term goals and peace of mind? This is where the the Mad Fund comes in. The simple act of building an account for the flat tire, broken washing machine and small first world problems can keep you from paying the $2,000.

Start by paying yourself $50 per month into a saving account. Yes, a vanilla saving account. Try to build the account up to about $5,000. This saving should be enough to cover the next “why me” moment in your life. This will also save you the interest charged by the credit card companies and allow your other investments to stay in place. The last part is key. Once you have an investment in place try to keep it working for you as long as possible.

The simple act of saving for a rainy day can keep two grand in your pocket. No one has an investment which is guaranteed to pay you 25%, well at legally anyway. I can guarantee you the interest rate of your credit card, which in some cases is 24.99%. This financial concept is not get rich quick scheme, it is designed to keep you from being poor. That is a great first step toward financial freedom.