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Why You Need a 'Fun Fund' in Your Budget

Erin Lowry

Weight loss and debt repayment have some similarities when it comes to cutting out what your body and wallet doesn't need. Like crash dieting, the deny mentality of debt repayment can cause people to swing from one extreme toward the other. Weeks or months of deprivation can lead to a major shopping spree, attending an expensive event or booking that vacation because, "Hey, I've been good lately."

Instead of dealing with the yo-yo of deprivation and excess, a "fun fund" helps both those in the red and in the black keep a level head and fuller wallet. Here are some benefits:

1. Prevents you from feeling deprived.

Debt repayment weighs heavily on the minds of a majority of Americans. About 42 percent carry credit card debt with an average balance of $10,902, according to an April study of 1,435 people by MagnifyMoney.com. Unfortunately, the process of digging out of debt resembles the process of shedding extra pounds. It's time intensive, involves a lot of self-discipline and can lead to a life of deprivation.

Those dedicated to paying down debt, and paying down debt quickly, run a cost-benefit analysis of every financial decision.

Want an afternoon coffee break? Better drink the office coffee instead of popping into a favorite café.

Have friends going to happy hour and a movie? Time to cue up Netflix and pour a glass of wine.

This constant inner-struggle to splurge or throw a few more dollars toward debt repayment can leave a person feeling stressed, overwhelmed and deprived. The fun fund helps alleviate those pressures.

A fun fund should only be a small percent of a monthly budget, especially for those trying to pay down debt. But $20 a month earmarked for splurging could mean a trip to the movies, a manicure, an afternoon of hitting golf balls or a few drinks at happy hour.

It's imperative to evaluate your budget and see exactly how much can be put toward a fun fund instead of haphazardly picking a number.

2. Forces you to evaluate your purchases.

Snagging a magazine in the checkout line, throwing a quarter in a gumball machine or picking up a latte on a particularly rough morning seems harmless.

Everyone has a threshold when it comes to spending money. Perhaps it's a quarter, it could be $5 or even $25. But everyone has an amount they spend thinking, "Hey, it's only XX."

It's perfectly acceptable to spend money on a latte or a magazine or a gum ball. Just understand if your spending threshold is $5 a day, those $5 add up quickly.

A fun fund can help curb those small purchases. Tracking money spent on the nonessentials forces people to see exactly where their money goes and if that's really where they want it spent. For example:

-- Lillian's fun fund is $100 a month, and if $50 of that money is earmarked for morning lattes, then no problem. She can sip away on steamed milk and espresso in peace.

-- Erica's fun fund is $100 a month, but she'd rather spend her money on a nice dinner out and a trip to a museum. Spending $5 on a latte could be the difference in an entree option, so she'd pass on the morning coffee.

3. Inspires creativity.

Budgeting an allowance for indulgences can inspire creative ways to maximize money.

Instead of buying something new, perhaps seek out a do-it-yourself project from Pinterest . Take charge when making plans with friends, and offer thrifty alternatives for decadent brunches, expensive shopping trips or costly nights out.

Couples with fun funds may choose to picnic in the park, explore free local activities or pool their individual fun funds for a big night out together.

Finding More Money for Your Fun Fund

Extra money can come from minimizing costs or maximizing profits.

If you're looking to minimize costs, spend a month tracking each penny you spend. It takes 30 seconds to turn on a smartphone and type in the date, amount spent and product purchased. Or even kick it old school, and write it down in a notepad.

Whether it's spending too much money on groceries that get tossed in the garbage, paying for cable when you use streaming services more or the often-mentioned latte -- finding the leak in your budget could open up more money to put toward debt or a fun fund.

The enterprising budgeter may see his or her restrictions as inspiration to create other streams of revenue through an extra job, inventing a product to sell or even finding a quick influx of cash by selling items he or she no longer uses.

The bottom line: Whether it's $5 or $200 a month, the point of the fun fund is to help you achieve other financial goals. By focusing on spending only a set amount each month on indulgences, you can use income to pay down debt, save for a large purchase or even invest.

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