Over the past month, Selenid and I have been experimenting with what I call the “checking account challenge.” And we are finding it to actually be pretty useful, if not a little stress inducing in a kind of good way.

I actually think this is a fantastic exercise for anyone to help improve their financial well-being. Whether you are just starting out or are along the path on relative autopilot. In fact, prior to starting the checking account challenge, I felt that we were on relative autopilot without a real ton of room for optimization. But this actually helped and did change things for the better.

The inspiration for the checking account challenge

It really was a conglomeration of two things that gave me this idea.

First, I have to give credit to Ramit Sethi and his book, I Will Teach You To Be Rich. I didn't agree with everything in the book, especially as it relates to high income earners. Regardless, he talks about how he keeps just enough money in his checking account to cover expenses. It's a quick mention but it stuck with me.

Second, a little while ago we had our PTO sell back at my hospital. I had enough PTO accumulated that I essentially earned an extra paycheck. The “problem” was that I didn't have anywhere marked for that money to go. Previously it would go to pay off student debt but no need for that anymore. We didn't have a rental property to buy immediately either. But I hated seeing it just sit in my checking account.

As a result, I started the checking account challenge.

How the checking account challenge works

Step 1 – Figure out your average monthly expenses for wants and needs. You may have already done this via your budget and in creating your savings rate. If not, that is the big first step. Use my budgeting template here.

Step 2 – Every paycheck that comes in, keep just enough money in your checking account to cover those total expenses. For example, if you spend on average $10,000 monthly, keep $5,000 from each paycheck in your checking account.

Step 3 – Transfer the rest into a separate savings account.

Step 4 – Don't dip into that savings account. Pretend that the money in the checking account is all you have. If you are really just getting by then you calculated correctly. If you have too much extra in each month, increase the amount you transfer out. And if you have too little, re calculate your expenses or examine your spending habits.

Step 5 – Rinse and repeat for 3 months. Determine based on your written financial plan (my financial plan is here) where this extra money should go. You can also use it to buy something if you are already meeting all of your financial goals and milestones.

The benefits of the checking account challenge

1. It makes you more financially aware

Last month, before my final paycheck, Selenid and I had about $600 in our checking account. It felt stressful. Because it hadn't been since residency that we really felt like we had to watch our spending.

Now, mind you, we had over $31,000 in our primary savings account along with a separate emergency fund account. So we were fine in the event of anything unexpected that could come up.

But this exercise made us actually think about our daily spending. What happened was that we basically spent like we normally would. We have a good sense of our budget and how much we spend and had calculated to leave the right amount in our checking account.

But that feeling of financial awareness was helpful because…

2. You don't spend as much unintentionally

I would wager that I am very much on the intentional side of the unintentional/intentional spending spectrum. But even with that being the case, I didn't realize just how much I still spent unintentionally until doing the checking account challenge.

Because what naturally happens is that we generally have more money in our everyday checking account that we actually need to cover expenses. And when that money is just “there,” it's easier to spend.

So sure, I would still look at some purchases and think if the amount of joy I would get out of it was greater than the price tag. But my bias was to err on the side of buying if it was close. Because the money was there.

Well, now that we tricked ourselves into feeling like the money isn't just “there,” we really have to run the intentional buying exercise in earnest. Of course, if something truly is an intentional spend I still buy it. But I think I'm making better determinations as a result…

3. It increases our savings rate

Money is kind of like time. We never feel like we have enough of either. But when something important comes up, we find a way to make time. That's the fallacy of not enough time.

Similarly, we may think that we need every cent that is in our checking account now. But the reality is that we tend to spend up to the amount we feel we have. And the checking account challenge is all about creating the illusion of a lower hard money limit.

Magically, as a result of this exercise, you find extra money that you didn't even know you had. And that's a good thing because…

4. You can accelerate your path to financial freedom

A higher savings rate creates more rocket fuel for your journey to financial freedom. With your new found extra savings, you can:

• Make sure you maximize contributions to your tax advantaged retirement accounts
• Fund your backdoor Roth IRA
• Contribute more to taxable investment account via broadly diversified low cost index funds
• Invest in real estate passively or actively
• Pay off bad debt quicker

This is all really great stuff. This means you can live and practice medicine if you choose on your own terms…sooner!

But you also can…

5. Spend the money on whatever you want

That's right. Let's say you are meeting all of your financial goals. And you are comfortable with your FIRE trajectory.

Well, then you can spend the money however you want…ideally intentionally. Or you can donate to charity. Or anything else.

I lied earlier. The third impetus for Selenid and I starting this challenge is we are saving for a home renovation and a, yes, new car to replace mine. These are intentional sounds and we are getting closer and closer thanks to this exercise!

My challenge to you

I challenge you to take part in the checking account challenge for at least 3 months. Do it earnestly.

Figure out your expenses. Leave only that amount in your checking account. And transfer the rest out. Then live with the initial uncomfortableness and reap the long term tangible and intangible rewards.

Then use these 10 additional ways to jump start or optimize your path to FIRE!

And keep me posted on your progress! Tell us when you started the checking account challenge and how you are doing in our private Facebook group. I'll keep you posted as well!

What do you think? Will you accept this challenge? How do you think it will go? Does any part take your nervous? Excited? Let me know in the comments below!