Have you ever wondered if HOW you pay for something affects HOW MUCH you’re willing to spend? Is it harder to part with cash than to slide your credit card through the machine? Do a $200 pair of shoes give you pause to think if you’re spending cash more so than if you’re putting it on your credit card?

You betcha!

A study in The Journal of Experimental Psychology says that shopping with cash discourages spending while using credit or gift cards actually encourages it. Fittingly called “Monopoly Money”, the authors of the study – Priya Raghubir from New York University ande Joydeep Srivastava from the University of Maryland — say, “…using a less transparent form of payment such as a credit card or a gift card lowers the vividness with which one feels that one is parting with real money, thereby encouraging spending…”

This is one of the big benefits of using the Magic Jars to keep your spending on track. Because you’re dealing in cold, hard cash, you’re more likely to weigh your priorities carefully, especially when you are thinking of buying something that isn’t essential. As the authors say in their study, “The outflow of money is very vivid when individuals use cash making it painful to part with …cash payments are more likely to be used for justifiable necessities and less likely to be used for frivolous luxuries which may accentuate the pain of paying.”

Add the fact that the Magic Jars make is very clear when you’re getting to the end of the money and suddenly Needs become far more important than Wants.

Such a simple idea: being able to see when the money is coming to an end. So why is it that if we know we need to live within our means, and we know that money runs out, we are so willing to waste it?

If everyone has access to free banking (not everyone does, I know), why does anyone pay for banking transactions? If everyone can get from point A to point B in a car that costs just $160 a month, why does anyone plunk down $549 a month in car payments? And if a $40 pair of shoes will do the job, why are we willing to spend $240 on a pair of shoes?

If you did not have access to credit of any kind — no credit cards, no line of credit, no over-draft protection, no loans – would you be as willing to drop gobs of your hard earned money on things like expensive shoes and fancy cars? Or is it the fact that you can defer feeling the pain of payment that lets you convince yourself that you Need that shiny truck with the whopping monthly payment?

I’ve worked with a lot of people who cry about how much debt they have. They sigh despondently when’s they consider that they may never shake free of the burden. They cringe when they think about how much interest they’re paying every year. (Sure, $200 a month may seem like not too much, but that’s $2,400 you could have put in your retirement savings plan, so don’t tell me you don’t have any money!)

Those same people are quite willing to buy a new snappy pair of pants, a lovely set of dessert dishes, or their 37^th pair of shoes. Whazzup with that? Why has consumption become the main way we feel better about our lives?

No doubt the deferral of payment has a big part to play in desensitizing us to the pain of payment. If we can have dinner out with friends tonight, and not have to deal with the idea of paying the bill until two weeks Tuesday, it’s easy to swipe the card. And that’s why, if you’re going to use credit in any form, you need to be tracking your spending as you spend. It’s the ONLY way to keep you in the moment and create a sense of real cost when you use credit.

All you need is a notebook and pen. Put your balance at the top of the first page and then track every cent you spend manually so you always know exactly how much money is in your account. Whether you use a debit card or a credit card, deduct the amount you’ve spent from your balance so you’re feeling the “pain” of having spent the money and you’re not tempted to spend the same money twice.

Yes, keeping track of what you’re spending takes a little getting used to. But it’s well worth it to keep your accounts in balance and your impulses in check. Just think about how much time you spend earning your income. Shouldn’t an equal amount of time be spent in considering and tracking how you spend it?

Now that the economy has gone to hell in a hand-basket and people are losing their jobs left, right and centre, it seems that the whole idea of an emergency fund has come full term and is ready to be born into people’s reality. Wow! I’ve been preaching the importance of an emergency fund and 25 years later I’m in style.

An emergency fund is a key component of any sound financial plan. The huge barrier for most people is how intimidating the process of saving up six months’ worth of essential expenses has been. Six months’ worth? In a savings account? OMG!

I’ve been battling The Easy Way Out solution most financial institutions offer: the line of credit emergency fund. Bah! How is going into debt on a line of credit during an emergency a sensible solution? It’s not. It’s the excuse people use for not saving! Plain and simple, it’s the lazy man’s solution. And it’s expensive, soul stealing and bad planning (or would that be “no planning?”)

People who don’t see the point in having an emergency fund are either really, really short-sighted, or completely unwilling to stop spending all their money. They are so averse to taking a little bit of what they are blowing on crap and setting it aside that they’re willing to brave the terrors of an emergency (and it’s only a matter of time) without any kind of safety net.

How good would it feel to not have to panic when the car breaks down and you need to come up with an unpredictable $2400? How much safer would you feel if your baby, your mom, your partner gets sick and you must take time off work (without pay) to see to their needs? How much smarter would you feel if you got laid off from work and had enough money set aside to keep a roof over your head and food in your belly until you could get another job?

An emergency fund is CASH you’ve accumulated so that you can you have the money you need to keep things in balance when the crap hits the fan. Most of the time, it just sits there earning a pittance in interest, waiting to be called into active duty when The Worst happens.

Some people have a problem with the concept of the money just sitting there. Once they’ve built up a couple of thousand dollars, they start thinking of that money as spendable. The vacation becomes a “sanity emergency.” The replacement windows become a “home emergency.” They run up their credit cards and that becomes a “debt emergency.” They find a way to rationalize spending the money because the idea of having that money sitting there is so foreign to them.

People, anything you can predict having to spend money on should be a line item on your budget and become a planned spending category. Vacations, new windows and whatever you blew money on your credit card to buy are all predicable expenses. Even on-going vehicle maintenance is a predictable expense. It only becomes an emergency when the cost exceeds what you’ve managed to accumulate.

When you add up what it costs to keep your family going for six months, you might be intimidated by the amount you have to accumulate in your emergency fund. Six months of essential emergency expenses can be an enormous goal. So start small. Make your initial goal $500. Once you reach that benchmark, set your next goal.

Make your savings automatic. If you decide to save $100 a month, have that amount auto-debited from your main banking account to your high interest savings account every month. You’ll get used to living without that money in no time flat.

Gail, where am I going to find $100 a month? You might be surprised if you just put a little thought into it. If you’ve got car and home insurance, combining the two with the same insurance company could save you up to 20% on your policy. Better yet, shop your policies around to see if another company is prepared to give you a better deal.

Cut $25 a week out of your grocery budget, do some meal planning, shop with a list, and watch your emergency fund grow instead of your thighs.

Swap eating out for a fancy dinner at home and you’ll not only save money, you’ll learn to be a better cook. Invite friends for a pot-luck, and watch the evening turn into a night of laughter and games.

Combine your errands, car-pool with a co-worker, or hop on your bike and bank what you save for an emergency.

Go over your monthly auto deductions and see what you can trim or eliminate completely. Do you really watch that much TV that you’re willing to drop $100 a month on satellite or cable? Cut it in half and you’re half-way home to monthly emergency fund amount. Ditto your cell phone, long-distance bill, gym membership, and anything else you buy routinely that you’re now taking for granted.

The key is to actually save whatever it is you’re “saving.” Leaving it where you can spend it on coffee or a new sweater is self-defeating. Moving it somewhere you can’t touch it means it’ll be there when you REALLY need it.