How to Create a “Fun Fund” for Safe Splurging

One of life’s great pleasures is splurging. It’s fun to spend a little more than you “should” on something that you really enjoy. It’s also nice to be able to be a little spontaneous in your spending. Unfortunately, splurging has a bad rap. It’s often associated with spending money that you don’t actually have. A splurge is often accompanied by feelings of regret, since you might have pulled out the credit card so that you could make the purchase.

It doesn’t have to be that way, though. You can splurge without busting your budget if you prepare ahead of time. While it seems a counter-intuitive to plan ahead for splurges, the reality is that setting aside money in a “fun fund” can be just the thing to provide you with a way to never worry about what you paying for things in life that you truly enjoy.

Build a “Fun Fund”

One of the things you can do is build a “fun fund.” Your fun fund should be money that you can draw on, outside of your budget, when you want to do something a little extra, or make a purchase that is above and beyond.

Your first step is to figure out how much money you can set aside each month for your fun fund. It can be a percentage of your income, a flat amount of money, or even just whatever change you have saved up in a jar. The important thing is to plan ahead so that you are putting money into your fun fund. For my fund, I normally just figure out what’s left over at the end of the month after we’ve spent money on our priorities. After those things are squared away, I put leftover money into the fun fund.

Where to Keep Your Fun Funds

Once you have decided to set money aside, you need to decide where you want to keep it. You can keep the money in a high-yield savings account, where your principal is safe, thanks to FDIC insurance (you just have to worry about the effects of inflation). The advantage to keeping your money in this type of account is due to the fact that it’s instantly accessible.

I actually keep my fun fund in a taxable investment account. This way, the money set aside has the potential to grow at a faster rate. Much of my fun fund money is invested in income-producing assets, like dividend ETFs and bond funds. That way, I receive a small amount of extra income, which is the automatically reinvested.

Accessing the fun fund is a little trickier, though, since the assets aren’t as liquid as cash. Usually, I use a rewards credit card to pay for the actual purchase. Then, I can liquidate the shares necessary and use the resulting cash to pay off the credit card. The downside to this process is that if any of the capital gains are short-term, they are taxed as ordinary income. However, I’ve been building up the fund enough that, much of the time, what sell is more than a year old, so the capital gains taxes are a little less. In instances when there is actually a loss, I end up with a tax deduction.

Figure out what works for you. If you can manage to save up ahead of time, your splurges won’t be much of a problem, and you can feel comfortable with the money you spend.