What Is A Slush Fund?

A slush fund is a financial reserve for unexpected expenses or discretionary spending. Often utilized by organizations or individuals, a slush fund provides flexibility and security, allowing quick responses to unforeseen opportunities or emergencies without disrupting regular budgets. However, the term can sometimes carry a negative connotation, as it may be associated with mismanagement, corrupt political purposes, hush money, and other illegal activities.

In this blog, we'll explore the various uses of slush funds, their potential benefits, and the best practices for managing them effectively.

Defining a slush fund

A personal slush fund is a reserve of money set aside for handling unexpected expenses or discretionary spending, like an emergency fund. Unlike a traditional budget that allocates funds for specific purposes, a slush fund offers more flexibility, allowing the holder to access funds without rigid constraints.

This makes slush funds an essential tool for addressing unforeseen circumstances, whether it’s covering an emergency expense, seizing a sudden opportunity, or paying for spontaneous purchases. The key feature of a slush fund is its adaptability, providing a financial cushion to manage uncertainties with ease.

Origins of the term

The term "slush fund" originally referred to a fund derived from the surplus or "slush" of fat or grease from ships' kitchens, which was set aside for various purposes. Over time, the term evolved to describe cash kept for discretionary or informal uses. In modern contexts, the term can sometimes carry a negative connotation, implying misuse or lack of transparency. However, its primary function remains as a tool for managing unforeseen expenses.

Purpose of a slush fund

The primary benefit of slush funds is to provide financial flexibility and preparedness. For businesses and organizations, it allows quick responses to unexpected opportunities or challenges, such as seizing a sudden investment opportunity or addressing emergency repairs.

For individuals, it can cover unexpected personal expenses or provide funds for spontaneous purchases without disrupting regular budgets. The benefits of maintaining a slush fund include enhanced financial stability, reduced stress in the face of unexpected costs, and the ability to act quickly and decisively in various situations.

Why you need slush funds

Financial security

Having a slush fund is crucial for maintaining financial security and resilience. It acts as an emergency fund against unexpected expenses that could strain your finances. By having readily accessible funds, you can address unforeseen costs, such as medical emergencies, car repairs, or urgent home maintenance, without disrupting your regular budget or incurring debt. Additionally, a slush fund provides peace of mind, knowing you are prepared for financial surprises.

Calculating your needs

Determining the right size for your slush fund involves assessing your financial situation and potential risks. Start by evaluating your monthly expenses and identifying areas where unexpected costs might arise. Find a budgeting rule that works for your situation and ensure you have enough set aside to cover your expenses and savings goals, like either paying debt or investing. Consider factors such as your job stability, health, and lifestyle.

A common recommendation is to set aside three to six months' worth of living expenses to build savings if you lose your income. However, this amount can vary based on individual circumstances and personal comfort levels. Regularly reviewing and adjusting your slush fund can help ensure that it remains adequate for your evolving needs and provides the financial cushion you require.

Creating Your Slush Fund

Choosing the right account

Selecting the appropriate account for your slush fund is crucial to ensure accessibility and financial growth. Ideally, you can choose a high-yield savings account or a money market account that offers easy access to your funds while providing interest to help your money grow.

The interest rate for high-yield savings accounts is higher than standard ones. These accounts offer the liquidity needed to help you pay for unexpected expenses in emergencies or spontaneous spending while also ensuring your funds earn some return over time. Avoid accounts with withdrawal penalties or restrictions, as these can hinder your ability to access funds when you need them most.

Building your slush fund

Building a slush fund requires disciplined saving and consistent contributions. Start by setting a realistic goal based on your calculated needs. Begin with a small, manageable amount and gradually increase your savings over time. Here are some steps to help you build your slush fund:

1. Set a budget: Determine how much you can afford to save each month without straining your regular budget.

2. Automate savings: Set up automatic transfers from your checking account to your slush fund account to ensure regular contributions.

3. Cut unnecessary expenses: Identify and reduce non-essential spending to free up more money for your slush fund.

4. Boost income: Consider side gigs or freelance work to earn extra money and increase your savings rate.

5. Windfalls and bonuses: Allocate a portion of any unexpected income, such as tax refunds or bonuses, directly to your slush fund.

Managing your slush fund

Ongoing maintenance

Proper management of your slush fund ensures it remains effective and sufficient to meet your needs. Regularly monitoring the account to track your savings progress and make adjustments as necessary is crucial. Continue to make consistent deposits, even after reaching your initial goal, to account for inflation and increasing expenses.

Periodically reassess your financial situation and expenses, and adjust your contribution amounts if your circumstances change, such as a salary increase or a significant lifestyle change. Keeping your slush fund separate from your regular checking account can help minimize the temptation to dip into it for non-emergency purposes.

Additionally, stay informed about interest rates and consider switching accounts if better rates become available, especially if you have your slush fund in a high-yield savings or money market account.

Using your slush fund wisely

Using personal slush funds wisely is key to maintaining its purpose and benefits. It's essential to differentiate between legitimate purposes in emergencies and discretionary spending. Reserve your slush fund for genuine emergencies, such as medical bills, car payments, or other situations where immediate access to funds is crucial.

Occasionally, you may use slush funds for unexpected opportunities that could provide long-term benefits, such as a sudden investment opportunity or a limited-time offer on a major purchase. Whenever you dip into your slush fund, prioritize replenishing it as soon as possible to ensure it remains available for future needs.

Avoid using your slush fund for non-essential purchases or routine expenses that should be covered by your regular budget. By managing your slush fund carefully and using it wisely, you can maintain a financial cushion that provides security and flexibility in the face of life's uncertainties.

Build your savings with KOHO

Whether you have savings goals, like to retire early, or want a financial cushion for extreme events, like surviving a recession, we can help. Our high-interest savings account gives you a higher interest rate than standard savings accounts, boosting your earnings and maximizing your savings.

Get insightful finance tips on managing your transactions and building healthy habits that set you on the path toward financial independence and success. We also offer other services to build your credit with KOHO and help strengthen your credit profile and improve your creditworthiness. Get a free credit score report to track your progress and make adjustments.

In addition to helping you save for a slush fund, we also offer Cover, an overdraft protection coverage service. Cover provides up to $250 in cash advances, giving you an additional safety net for emergencies and unexpected expenses.

Basically, you need some money to buffer unanticipated spikes in short-term spending (whether it’s a true emergency or not). So that, instead of feeling bad when you can’t make your budget stretch to accommodate the 15th wedding of the year, your “slush fund” steps in and gives you a hand.

Why do you need one?

It’s pretty simple.

First, you want to avoid putting charges on your credit card that you can’t pay back. If you’re carrying a balance on your credit card, it’s costing you a minimum of 20% in annual interest (about 1.67% per month) and hurts your credit score. So do a quick check – if something unexpected were to happen to you right now (like a procedure that isn’t covered by insurance, or an emergency vet appointment), would you have to put it on your credit card?

Second, you’ll just feel better knowing you have back-up cash if you need it. Erin Lowry, in her book Broke Millennial, suggests that even a small slush fund can ease your mind and lead to smarter financial decisions. Not having one, of course, could have the opposite effect.

How much money do you need in your slush fund?

Despite what you may read in financial blogs, deciding the amount to save is an art, not a science. But here are some things to consider when determining how much to save:

Consideration 1: How stable is your income?

The Instagram influencer, even with an impressive amount of followers, needs more savings than someone with a stable job at a stable company. Why? During slow months, they need cash to lean on, and in busy months, they can stash more away.

For someone with a stable job, the general idea is to aim for 3-6 months of expenses. For someone who is self-employed, aim for 6-9 months worth of expenses.

Consideration 2: What types of expenses do you think might run through this account?

First, what type of fixed or non-negotiable expenses do you have? These are the ones you can’t dial down quickly (like rent, mortgage, car payments, student loans). The more obligations you have, the more you need to save. Even with a generous spouse or parent, if you have multiple mortgages or pieces of debt and something bad happens, you’ll need more cash saved up.

Second, remember that this isn’t a traditional “emergency fund” (fingers crossed one will never happen), but rather a “slush fund” or back-up cash for spikes in spending. So what type of big expenses could you personally run into?

Just the occasional extra-big shopping trip or gift? Then, you probably don’t need too much. Or are you in the stage of life where a bachelor party and 3 weddings will inevitably pop up? You’ll need to dial up your savings. Or, are you a family with several kids (who, on account of their genetics, will likely need braces soon) who owns a home (which could require repairs at any time)? Then you’ll need to think big.

"Are you in the stage of life where a bachelor party and 3 weddings will inevitably pop up? You’ll need to dial up your savings."

Just like with the other aspects of your financial health, determining the size of your slush fund really depends on where you’re at in life. People straight out of university know they can probably move back home if something goes wrong—they’re likely earning, saving and spending less than other people so their slush fund can reflect that.

And the corollary is that if you’re sending your baby off to university, you probably want enough in the slush fund that if your little darling needs to move home it’s easy to accommodate for an uptick in expenses without canceling the kid-free vacation you were looking forward to.

Consideration 3: Do you have a financial back-up plan?

Do you have a spouse or partner you can lean on for a little bit if you really need to? What about a parent who’s basement you could crash in for a couple months?

Another saving grace is a side-hustle, low-cost line of credit, or a resume that could get you a job in Silicon Valley at the drop of a hat. Essentially, the greater access to emergency cash you have, the less you’ll need to save up front.

Let’s face it - bonuses disappear, people get sick, and sometimes people need to leave their office job and soul-search for a year in South Asia. A slush fund gives you flexibility and peace of mind in all of these situations.

But what if you have high-interest rate debt?

If you have a credit card balance or student loan that you’re diligently working down, you still need an emergency fund, albeit a smaller one. Aim for a slush fund of around $1,000 to $1,500. After you have this locked down, you should then move on to putting as much money towards your credit card balances as possible (it’s expensive to finance your life at 20%!)

In which account should my slush fund live?

You can make your little slush fund grow into a bigger slush fund with the help of a little interest.

Shop around for the best high interest savings account (“HISA”). Look for one earning at least 2% per year, with no transaction fees, and that’s easily accessible. You’ll want your savings account to be separate from the account you use for day-to-day transactions so you don’t accidentally spend it.

Once you have a shiny new slush fund you’ll be ready to face wedding season, an emergency vet bill, or whatever life throws at you. It feels good to be prepared.