The first one. We pay ourselves a small amount for spending each month. The rest goes to our home loan offset account to save us interest until we get bills that have to be paid. I set them to be paid by BPay on the due date & pay everything I can on credit so it stays on our home loan as long as possible.

I worked out roughly what bills we have during the year and what we wanted to save & that's how I decided how much to allocate as spending money. Spending money covers meals out, clothes, entertainment & whatever else we "want". I generally spend mine on the kids lol. DH spends his on golf & gambling.