The term “slush fund” refers to money that has been set aside without a designated use. A business might keep a general account that is a slush fund. However, many people use a slush fund when managing their personal finances without realizing it.
Here’s a look at the history of the term and how a slush fund can benefit one’s finances.
What Is a Slush Fund?
A slush fund is an unregulated fund — or, put plainly, a stash of money with no designated use. Although some people generally assume a slush fund is for illegal activities, this term has a unique history that began during the 18th century in the shipping industry.
Slush Funds Then and Now
Some 300 years ago, a slush fund referred to extra funds sailors made from selling bacon fat, or what they called slush. It wasn’t until much later that the term took on the negative connotation many people know now — funds used for bribes or illegal activities. But a slush fund can also serve a legitimate purpose.
Now a slush fund often refers to an “emergency fund” in relation to personal finances, or simply funds that fall outside of the daily budget. Technically, an emergency fund’s designated use is to pay for unexpected expenses. But until an unexpected expense arises, one could argue the money is undesignated.
While people are no longer selling bacon fat to build slush funds, they are still building them and realizing the benefits.
Benefits of a Slush Fund
The biggest benefit of having a slush fund is being able to avoid debt. A slush fund can mean the difference between pulling out a credit card to cover an unexpected expense and having the cash to pay for it.
The slush-fund concept can be a helpful tool for building savings. Intentionally stashing money away for any reason is an excellent habit to develop.
Having a slush fund can minimize financial stress. It can help reduce some of the worries if a loss of income or other financial emergency occurs.
Starting a Slush Fund
Everyone should have at least one slush fund. Ideally, savers could have a few slush funds waiting for a specific designation, such as:
- An emergency fund
- A sinking fund
- A holiday fund
- A vacation fund
- An education fund
The vacation might not be planned yet, and future emergencies are unknown — but the money will be there when needed if stashed away regularly.
A wise use for a slush fund is to hold monthly budget surpluses. Then the money can be used to cover months when there is a shortage. This can be especially beneficial to those with an unpredictable income.
How To Set Up a Slush Fund
When it comes to a personal slush fund, whether it has a designated use or not, it should be put to work. At a minimum, it should go into an interest-bearing savings account.
To start a slush fund, open a new account online. Set up automatic transfers from checking into the slush-fund account if there is room in the budget. Small, regular transfers will hardly be missed, but they will be greatly appreciated when needed. Or just use the slush fund to stash budget surpluses.
How Much To Have in a Slush Fund
The recommended amount to have in a slush fund depends on the use of the fund. If one is using a slush fund as an emergency fund, three to six months’ worth of expenses has typically been the recommendation.
Three to six months of expenses will be different for everyone. But suppose the monthly expenses are $2,500. Three to six months’ worth of expenses would be between $7,500 and $15,000. These are significant amounts and may feel out of reach. In fact, the pandemic now has financial experts rethinking this wisdom and recognizing that three to six months’ worth is an unattainable goal for many.
How To Gradually Build a Slush Fund
If saving even one month of expenses feels overwhelming, think small but save consistently. Even just $50 saved is better than $0. As long as the slush fund is bigger than in the previous month, it is headed in the right direction. Keep in mind that the slush fund needs to cover only necessary expenses. If an expense can be cut, such as a streaming service, savings do not necessarily need to cover it.
The slush fund will likely be used at some point, but making those small, regular payments will gradually build the fund back up. The same holds for any slush fund.
A slush fund might not be a commonly used personal finance term, but the concept is undoubtedly a useful tool. Hanging on to extra funds for future use makes good financial sense. Just make sure to put the money to work in an interest-bearing account if it isn’t going to be used right away.