| 04 May 2010
Slush funds may historically have a negative connotation due to corrupt politicians, but I prefer to think of my grandmother. I remember spending several weeks each summer at grandma’s house near Alexandria; she would take us toy shopping at the beginning of the week so that we would have something to play with during our stay. Before leaving the house she would always go to her slush fund, a specific drawer in the dining room, and pull out $5 or $10 to give to us to spend. When I look back on that experience I realize that it did not matter how much money grandma had; the slush fund gave her the freedom to enjoy life in the present without worrying about how that spending affected her retirement.
I have noticed that when markets are doing well, people are willing to spend more. And when markets are not doing well, people spend less. This is not profound but it does have profound consequences. In the last two years I have heard many say they wanted to take advantage of an opportunity but just did not feel like they had the money during a bad market. And if you think about it, a bad market is exactly when the opportunities arise – lower remodeling costs, marked down cars, travel specials, bargains at retail stores or even just helping an unemployed child. A good financial plan that allows you to retire should also allow you to have fun and participate in these things, in good markets and bad.
I propose that everyone should have a slush fund. And there can only be three rules to this slush fund. First, it can be used for whatever you want whenever you want; your financial advisor does not even get a say in it. I suggest you only consider using the fund if you really want something because rule number two is even simpler; when the money is gone, the money is gone. Every person will have a different size pot for their slush fund – probably 2-5% of their overall wealth at retirement. But that needs to last the rest of your life. The only way to get more into the slush fund as you spend it down is if new assets come in like the sale of a piece of property/other appreciated assets, newly earned income or an inheritance.
The third rule is the hardest – you have to enjoy the slush fund. Enjoyment means that you do not worry about spending this money, in good times or bad. This fund should take the pressure off when you weigh the effects of going on a dream trip to Italy against monthly living expenses. We financial advisors preach saving so often that sometimes we forget to also tell people to have fun.
A slush fund will free you up to make fun decisions while also putting parameters on those decisions. Since there is a finite amount in the fund, you will be forced to consider whether you really want something. But when you say yes to that question, you will enjoy it a whole lot more because the act of defining what is important and restraining spending to what is important will create a level of enjoyment you just cannot get by buying things whenever you want. My grandmother knew this, and she taught us how to make good decisions by simply using a drawer and calling it a slush fund.