Almost our whole life, we worry about how to make enough money. We wish we could make more money so that, well, we can make more of it.
And when we’re too focused on earning for the future, we tend to forget why we’re earning in the first place: Freedom.
Freedom to use it however you want without second thoughts.
And that’s what slush funds are about.
What Is A Slush Fund?
Slush funds have slightly different meanings depending on the setting. But in general, we call a slush fund to money without a designated purpose.
Let’s say you got a bonus at your job this month. After paying for all expenses, you’re left with some unspent dollars. That’s part of your slush fund, which you can spend on gifts, vacations, restaurants, and more.
Or you own a business. You earn extra profit and don’t know how to reinvest it. So you put some money aside in case you have surprise expenses later. That’s a slush fund.
Or you work for a corporation. If your organization earns more than usual, part of that money may go to employee bonuses, party events, or company dinners. Another slush fund.
You see, none of these contribute to your goals directly. If you have debt or run a business, then why not put that money there instead?
The benefits of slush funds are mostly psychological:
- Lower risk. You don’t worry as much about surprise expenses. Because you have enough money to cover that which you couldn’t foresee
- Guilt-free. You can spend this fund however you want. It doesn’t need to appear in your accounting reports
- Earning motivation. Although unessential, fun money makes you immediately feel the rewards of your hard work. If you buy yourself nice things, your brain will associate your work with those rewards. While that shouldn’t be your only motivation, it keeps you excited to progress in your career
Slush funds show everything that money can do for you, whether it’s a smart use or not. While it doesn’t contribute to your financial success, it makes it easier to get there.
Slush Funds In Business
While this sounds attractive in personal finance, slush funds have completely different connotations in business.
For companies, a slush fund can adopt the same features as an emergency fund. Except that it allows for more purchase freedom. It doesn’t necessarily need to be an investment. The point is: none of these dollars are accounted for.
The public will never know how companies, politicians, and corporations spend this money. You may assume it’s for emergencies, but it doesn’t need to be that way.
So why do slush funds have fraudulent connotations?
Think about it. It’s in the best interest of an organization to increase their reputation. If they spend money in a good way, they will say it everywhere, because that increases the investors’ trust.
Why would you want to hide the intent? Presumably, to hide the bad use of money:
It’s a common trait we have as human beings. We tend to glorify our victories while hiding our mistakes. While convenient, that’s where fraud begins.
Slush Funds: Legal Or Illegal?
If you invest in a company that has a slush fund, and part of your money goes there, you’ll never know how they’ll use it. Nor the proportion. You could be financing a scam without knowing it.
Because if the purpose were beneficial, there would be no reason to hide it.
With that in mind, we expect businesses to take the “legit” approach: reinvest in the company. Prepare for emergencies. Anything that increases it’s valuation.
You may wonder: then what’s the difference between slush and emergency funds?
Although you can spend it anywhere, a legit use of slush funds is funding new projects. This isn’t an emergency expense, but a way to anticipate and grow the company faster.
Emergency funds relate more to fees, repairs, taxes, marketing campaigns, recruiting, restocking… It’s how you fund the business when your revenue declines temporarily.
Let’s look at some fraudulent uses:
Suppose that a company reserves 5% of it’s funding for a slush fund, which doesn’t appear on accounting reports. Over a year, they may have accumulated thousands, if not millions of dollars hidden.
Suppose this company earns less this month, which may drive off investors. The executives could now bring in that secret money and make up its origin, such as “sales revenue.” The accounting report will show that the company has grown, so investors will keep financing them.
But the company isn’t growing.
Omitting The Income Origin
Imagine we gave you a million dollars in cash. Try depositing it into the bank. They won’t let you unless you can legally verify its origin.
While you don’t need to specify how you budget your slush fund, it has to be clear how you built that fund in the first place.
Was it borrowed?
Was it on some illegal businesses?
Was it with your money without consent?
How confident are you trusting such a company? Warren Buffet would say: “Only invest in what you know.”
Maybe the company lies about the income origin just to sound legit. And if you invested in this company, you may not be able to withdraw.
Unfortunately, there’s no way to foresee this unless you’re a company insider.
A company may explain to investors how they’ll use their money and what proportion goes into what. Then, in practice, they may do differently from what they promised.
They may say that 5% goes into the slush fund, when they’re actually taking 30%.
Sometimes, the company doesn’t even admit they have a slush fund. You think they’re working with your money when it actually goes for personal use.
And nobody needs to pay you back. Because as an investor, you’re responsible for your wins and losses. While reporting may put scammers in jail, your money is still lost.
Before you create a slush fund, you will likely want to invest and grow those savings. If so, it’s critical that you know who you’re trusting your money.
Do your research to avoid falling for charity scams, shady companies, and fraudulent fundraisers.
Personal Slush Fund: The Four Rules
In personal finance, slush funds can motivate you to earn more. And if you don’t want to fall for frugality or overspending, you must know these rules:
#1 Always invest in your slush fund
A common belief says: if you have debt or outstanding payments, that’s where all your money should go.
It’s easy to argue because slush funds aren’t a productive use of your money. You’d rather pay your debt, contribute to your savings accounts, or invest.
Because there’s always a better place to put your money, you will never find the right time for your slush fund.
The solution is to always invest something. Anything is better than zero.
Later, if you really insist, you can spend that money productively. But to do that, you have to build your fund in the first place.
#2 Allocate the right amount
A slush fund shouldn’t limit your financial progress. That’s why you should start as small as 1% of your monthly income. Especially if you’re in debt or expect big purchases.
Before you increase your contribution, three things should happen:
- You have no debt and covered all payments in the following months
- You have created an emergency fund worth at least two months of living expenses
- (Optional) You’ve contributed to investment vehicles/retirement plans
While essential, slush funds aren’t a priority.
#3 Have an abundance mindset
If you’re free to spend money however you want, price shouldn’t be an obstacle. And while you want to avoid overpriced offers, you shouldn’t be frugal with this money.
Saving doesn’t matter here as long as you keep contributing your minimum. And if your fund uses up quickly, that doesn’t mean to increase the allocation. If you want more in your slush fund, you have to increase your overall income instead.
There are reasons to increase the proportion (see number 2), and overspending isn’t one of them.
#4 Use your slush fund
This isn’t a savings account nor an emergency fund. If you don’t use it, that defeats the purpose of “fun money”.
While we could give you ideas to spend that money, we don’t think anyone has a problem with that. There’s no wrong answer.
But f you really can’t find any use, the best you can do is:
- Lend it at compound interest
- Make gifts to friends and family
- Donate to (real) charities
Money is useless until it’s used. And slush funds show us everything money can do, even if it’s not financially smart. It’s the freedom of spending however we want what motivates us to earn more.