Monday, February 10, 2014

Start a Slush Fund

I've got a little tip for you! If you are just starting to get control of your finances and budget your paychecks you might want to establish a slush fund. A slush fund is pool of money set aside for unexpected expenses. It is a little similar to an emergency fund, but for use for non emergency spending. Maybe you budget a certain amount for entertainment or eating out each month, but you get a call near the end of the month from out of state friends who want to meet for dinner. Your budget for eating out is zero this time of the month! Yes, you could say no, but you really want to see these friends. This is where I dip into the slush fund, because I know that it isn't an emergency. Some people might pull from another budget category and that would work too.

At our house, we don't budget by categories in great detail. Yes, we set aside money each month for Christmas, auto registrations, car insurance, but we don't break it down by groceries, gas, clothing, entertainment and so forth. We have a set amount we set aside for all of those things and just watch our spending as we go during each pay period. When we get near that set amount, we really slow our spending down or wait to buy something until the next paycheck. The amount we set aside for discretionary spending is conservative. We purposely do this to keep spending in check. And I will say we have increased it a little in recent years as we have noticed the price of food has gone up, but again very conservatively.

Our slush fund varies from month to month. It rarely is over $500, maybe an average of $300. Sometimes we don't put anything in because it is already funded well enough and we would rather send extra money to pay down our mortgage or save for our vacation. Some months the fund gets a lower than $50 if we have several dips into it. There is really no right or wrong amount. If the fund starts to get too big, over $500 in our case, I will pull that excess away from the slush fund and apply it to our current goal. For some this might be adding to an emergency fund or paying down credit card debt. In our case, we are currently paying extra towards our mortgage principal. I should also say some months we don't dip into the slush fund, because our discretionary spending is within the amount we set aside.

We keep our slush fund in our checking account currently. I am able to do this because I use a simple spreadsheet to track the slush portion of our checking account funds. It might be a little complicated for first time users. In fact, my husband probably doesn't even get it! If you are establishing a slush fund for the first time, you might consider a second checking account at your current bank, especially if you can get one for free. This way you will keep those slush funds separate and clearly know when you are dipping into those funds and for what amount. A second checking is better than a savings account, as many of those have rules on the number of times you can withdrawal from them without a penalty. You might be dipping in more than those, especially when you first start. I think it is important to keep it at the same bank because of the ease of transferring the funds. Usually instantly. An account at a different bank will have a couple days of wait time for the funds to be available.

Because we get paid twice per month, I simply evaluate the balance in our slush fund each pay period. Do I need to throw some more in, do I need to adjust the balance down for extra spending that occurred, or do I need to take some out because the amount is to big. I find it helpful and comfortable to have a slush fund, because it is stressful to see the balance in your checking account close to zero when you really NEED something or have an opportunity come up that you don't want to say no to. I do suggest that you try not to touch your slush fund too often, if you are doing it everyday there is a something wrong. You likely are spending too much, or cutting your discretionary fund to close.

Try it out, tweak it. Make a slush fund part of your personal budgeting plan. I really don't think you will regret it!

Do you already have a slush fund? What do you call it? What amount do you tend to keep in yours? Where do you keep it?

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