Slush Fund – Save it For a Rainy Day

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Saving my money creates options

Should you pay off debt or save?  Ah, the age old question, and one I love to tackle.  To be honest, I have changed my tune on this topic several times.  For awhile I thought the best decision was always to pay off debt – then I realized that a lot of times it’s best to pay off debt and save.

While my opinions may change, one fact always remains the same… saving my money gives me options.

Emergency fund goal met, now what?

At this stage in the game, an Emergency Fund (EF) harboring two months expenses delivers us a capable level of comfort.  Our August contribution made that goal reality, and with another milestone behind us, September arrived with a decision of its own – where should we begin funneling the freshly available $650 monthly EF contribution?

I immediately decided to bump our Next Auto Fund (NAF) from $350 to $500, but struggled with where to direct the remaining $500.  For several weeks I rested in our decision to put it toward the 2nd mortgage (2M) but never felt super comfortable about it.  Shortly before the September 2M payment was made, my mind was changed.

Slush fund

“The term ‘slush fund’ was originally a nautical term; the slush referred to the fat or grease that was obtained by boiling salted meat, the sale of which could then be used to provide the crew with special luxuries. The money obtained from this sale was placed into the so-called ‘slush-fund’.”  source

Basically… A Slush Fund is a place to SAVE extra money for a future purpose.  I like the sound of that.

Would contributing to a Slush Fund allow me to pay off my debt as fast as someone who saves a $1,000 EF then puts all their eggs in the basket of debt reduction?  Maybe, maybe not.  Mathematically debt reduction makes sense, until unexpected happenings deplete the small EF thus increasing the unintended likeliness of more financed debt.  Anything is possible so why not give yourself options?  You could always use extra savings to pay off debt in lump sum payments at a later date.

Long story short

In edition to the extra $300 we put toward the 2M and the extra $100 we put toward my Student Loan monthly, we created a Slush Fund for our extra $500 and will go forward from there.  After all… saving my money gives me options;)

The flexibility is what I’m after.  I will most likely use the fund to pay off debt in lump sums, but am giving myself the option to put it elsewhere… if it is needed elsewhere.

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1 Jeff @ Sustainable Life Blog

Great decision Matt. As they say, personal finance is PERSONAL. The nice thing about a slush fund like that is that it can be there to pay off debt if you want it to. If you decide at the end of the year you want to throw it all at you’re debt, you may be out 35-50 dollars in interest payments for 3 mos, but nothing beats the satisfaction of making a large debt payment.

2 Matt Jabs

My thoughts exactly!

3 Den

One idea may be to let your slush fund build up to your goal of $10,000…and then once you’ve hit that you can take $5,000 and send it to a debt…..then rebuild your slush fund back to $10,000 and do it again. That way you’ve got flexibility, but can also make some major progress on your debts.

Just a thought:)

4 Matt Jabs

That flexibility is precisely why I created the slush fund. I will most likely use it to pay off debt in lump sums, but will now have the option to put it elsewhere… if it is needed elsewhere.

All that said, I do not think this is a good idea unless the saver is disciplined enough to make the best choices with the savings. Frivolity would ruin a plan like this.

5 Jenna

Why aren’t you putting your slush fund into paying off your student loan debt?

6 Matt Jabs

Good question Jenna… I covered that in this article I wrote for FiveCentNickel.

In the end, I will put it toward the SL, but not until after I pay off the 2M.

7 Robert Espe

I use a similar principle. No matter how many other savings goals I have completed, or how much I am putting towards the next goal, I always put 10% of each check into a generic “savings” envelope, sort a CYB. It is the money that will replenish depleted funds, and I can use it to cover for things that still need to be worked into my budget. However, to keep it from becoming a source of extra spending money, any that was not used when my next check arrives is transferred into some other envelope with a more concrete purpose. Too easy to justify spending “unnecessary” money as it grows.

8 Matt Jabs

Yeah, if spending it randomly becomes a problem the whole point is moot – even though there is no defined purpose up front, other than as a “slush fund” there needs to be a secondary purpose once it reaches a certain amount. For me, I will either buy land (only at a patiently awaited, great bargain) but most likely will pay off huge lump sums of debt.

9 Steve in W MA

@”saving my money gives me options” : yes, yes it does!!!

I think that unless you have a specific purchase that is very important to make (say, you want to buy a house and you need a downpayment, or a plot of land and you’ll need the whole sum for that, or you’re thinking of pulling up your roots and moving to another part of the country or world), then paying off the debt is the best way to go.

That being said, having cash on hand gives you lots of options that don’t exist just by reducing or even eliminating your debt. Having the debt is expensive though so unless you foresee the need for something in your life that requires a significant cash outlay to get, then I’d probably advise putting the majority, perhaps 70%, of your available funds towards debt reduction, while putting another 30% towards a very much larger slush fund, allowing you to have some of the benefits of both having a larger amount of cash available to you and of having a smaller debt and smaller interest payments.

10 Matt Jabs

Ha ha, sounds like something I’ve heard before. :)

11 Steve in W MA

Hahaha! True enough, Matt!

12 myfinancialobjectives

Great idea. Mathematically I would say this plan DOES make sense – for the mere fact that life is full of uncertainties. Like you said, socking all your money towards debt may overall save you the most money, though “saving gives you options”. :)

I am doing the same thing I guess, though I never really thought about it like this. I’ve got a savings account with a couple grand in there that I am building up with no real intention in mind. I figure that once it reaches a certain point, and I still don’t need it, I’ll take a few grand out and pay a big chuck of my student loans. Great Minds think alike!

13 Matt Jabs

It’s definitely the way to go in this economy – at this point we need the options extra savings provides. In uncertain times there’s nothing like providing yourself a little certainty.

14 Danielle

Liking your flexible style ;) being realistic and open to changes with savings is a must! We never know when an extra expense is going to come up, so we need to be prepared to change our savings plans. From experience, paying off CC debt, it’s best to pay it in big chunks (if not possible to pay all at once), to avoid being caught up by interest. Glad to hear that you are meeting your savings goals, and hope that your Slush Funds continues to grow without interruptions. Thanks for sharing!

15 Will

Hi Matt,

Great article, and I’m glad that your personal finances are coming together for you. I’d like to offer two suggestions, however, that there might be more strategy you can apply to fine-tune and help further structure your finances.

The first is that you’re going to want to consider is how to make your emergency fund to work for you, since ideally it will just sit in a corner and never get touched. What I settled on was a high yield checking account (most offer over 4% interest), which handily beats average annual inflation AND nets me a bit of a profit! This is better than the rates on CDs, and you have full access to your money at all times (unlike CDs).

Assuming you’ve got your debt repayment under control and are enrolled in some sort of retirement plan (hopefully your employer offers a matching contribution!), the next step that my wife and I followed was to establish both a short-term savings fund and long-term savings fund. The short term savings fund is exactly what you’d expect – money you’re saving for large purchases in the next 5-10 years. We put this money into the high-yield checking account alongside the emergency fund, as a decade is too short of a time period to gamble that a stock investment will be profitable when we need to pay for something. Just make a schedule of your big-ticket wants over the next few years and figure out how much you’ll need to put in the fund to afford what you want on time.

The long-term fund is different – it’s actually a taxable brokerage account with Vanguard, which serves the purpose of generating a good investment return that we can access sooner than 59 1/2 years of age. We still contribute to retirement, but we also wanted long term money to use before we get there.

In practice, anything that doesn’t go into retirement, debt or the long-term fund ends up in the short term fund. Anyway, the more structured your finances are (within reason), the more likely they are to survive the emergencies and whims of human nature.

16 Matt Jabs

Hi Will, thank you for the excellent and thoughtful comment. I checked around for high yield checking accounts available in my area. The best I found was being offered from a bank over on the west coast of Michigan. Since I could not find any local branches, or local banks offering HY checking, I’m going to wait patiently until I find something.

Do you know of any Internet banks (like ING Direct) that offer HY checking? That I may try, as long as the bank solid on the other aspects of banking that are so important (fees, etc.) It would take a really solid deal to get me to stop banking with ING, they have been so great… interest rate is only one part of banking (and of course you are well aware of that.)

Let me know.

17 Steve in W MA

In order to prevent the money from being misused/misappropriated, I think it is vital with this kind of slush fund to do what you have done by determining the acceptable uses of the fund ahead of time. In your case, you know that this money is intended for one of two strategic purposes: the lump sum payoff of debt, or the purchase of land. When you have such a predetermined strategy for the buildup and use of a sinking fund like this you gain flexibility and the ability to react to opportunities and avoid the risk of using the funds inappropriately or without due consideration.

18 Matt Jabs

Precisely. Giving purpose and structure to my financial decisions is essential to the successful acquisition of my goal to become free from the bondage of debt!

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