Allowances Aren’t Just For Kids
Giving yourself a spending allowance is a great way to have some cash available for autonomous and guilt free purchases, while having the added benefit of reducing unnecessary purchases and increasing your savings.
When your available “spending” money is just part of your overall budget, it makes it far too easy to spend more than you need to on unnecessary stuff. So long as you are on budget, who cares if you bought yet another kitchen gadget or piece of clothing you didn’t really need. Over spending can easily get lost in the broader budget, and it makes it difficult to truly pare down your budget to the essentials. When you give yourself an allowance, you can’t shift savings from a reduced expense and inflate your spending while still staying “on budget”. For example, if you don’t spend your full budgeted amount on groceries one month, you don’t want to just flip those savings over into your spending category. Doing so results in missed opportunities to increase your savings percentage. The allowance forces you to draw a very clear line about the amount of money you are willing to spend on “wants”, and it’s much easier to hold yourself accountable, and realize true savings when you cut expenses.
It’s similar to the effect of using cash for purchases instead of a credit or debit card. The cash is tangible, and as it’s slipping through your fingers you physically see your available cash reducing. It’s much more apparent and psychologically impactful compared to when you just swipe a credit/debit card. When you swipe a card there is no physical connection to the money you’ve just spent. Instead there is a huge separation between you and the actual cash dollars. The level of awareness created when you use cash induces a much stronger feeling of accountability, and a more critical evaluation of what you’re spending that cash on, just like a self-imposed allowance.
While I don’t usually advocate using cash, largely because you miss out on some of the significant rewards available through credit cards, if your someone who has any degree of difficulty managing your spending, cash is the way to go. If you have your spending well in check, than it’s much more worthwhile to take advantage of the many incentives and rewards available through credit cards.
When it comes to spending, I like implementing allowances in tandem with using a credit card. Doing so allows you to take advantage of the reward structures that credit cards offer, while still providing yourself a clear limit and accountability measure for your spending.
When we originally bought our home, we set up a hybrid style of joint finances. We both had an individual account, an individual credit card, several joint accounts and a joint credit card. We structured our monthly budget by calculating our monthly expenses and savings target, and contributed equally to those amounts.
Any of our base income left over after having made these contributions remained in our individual accounts as our personal allowance. We could each do whatever we chose to do with that money (within reason of course!). We were both paid nearly the same salary, so it made sense to contribute to things equally, and resulted in us both being left with the same amount of spending money at the end of the day.
We would pay for all of our “needs” like groceries, gas, utilities, and some general “wants” like social outings we did together, movies, dinners, from our joint account. But individual “wants” like buying new clothes, or buying lunch at work when one of us didn’t feel like packing leftovers, those expenses came from our individual accounts.
This approach worked well for us in a number of ways. To this day Mike and I have never once had an argument about finances. I attribute that in large part to having these individual allowances, accompanied by the fact that we communicate often and clearly about our financial goals.
It’s incredibly hard to match spending styles, and different views and opinions on spending can easily lead to arguments over purchase decisions. If finances are entirely joint, and neither party has their own money which they have sole discretion over, it’s really easy for resentment and annoyance to build over small purchases. I tend to buy clothing a lot more often than Mike does, but by having my allowance I never felt like Mike was going to judge me or be angry about what I chose to spend my money on. That small allowance was my own money to do with what I pleased, I was accountable only to myself, and therefore I made my purchases guilt free and without concern of any reprisal or annoyance from Mike. Similarly Mike often liked to buy lunch at work, rather than packing leftovers. If those lunch expenses had been coming out of our joint account it would have been easy for me to become annoyed that Mike was often eating out, while I was packing a brown bag. Instead, because we both had our allowances, those small individual choices that could have generated conflict had zero impact on each other.
This approach also forced us to budget not only as a couple for our joint expenses, but on a much smaller scale as individuals. If I wanted to buy a designer clothing item, then I needed to plan for that and save my allowance accordingly. It provided each of us a little play money to enjoy some smaller luxuries of our choice, but the flexibility to save strategically if we wanted a bigger item.
As we became more aggressive about finding ways to decrease our expenses, and more comfortable living a simplified life, we have steadily scaled back the amount of our allowances, but we will always maintain some amount of individual spending money.
As a couple this approach can provide the best of both worlds when trying to decide between a joint or separate finance structure. Even if you don’t make the same salary, a percentage approach proportionate to your income can work well and leave both people with similar cash available for spending.
If one of you is working while the other is staying at home, I would be even stronger in my recommendation to try this approach. When someone isn’t being paid to go to work, but has instead taken over the role of homemaker or is caring for the kids, it is incredibly important for that person to have some discretionary cash they feel they can spend as they choose. Even if your allowances are small, setting aside something for this purpose can be very empowering.
If you are single, employing an allowance approach is still worthwhile, in that it can provide some clear limits to the “wants” category of spending, and help keep you accountable to your financial goals.
I said this earlier in the post, but it’s worth repeating. If you are your partner has difficulty managing spending, or being accountable only to themselves for their spending, do not use credit cards. In those cases I would highly recommend a cash only allowance.
Whatever your life situation, a spending allowance should be a key part of your financial planning. It’s a simple concept that is so often used to teach kids how to manage money, but is viewed as something that you grow out of as an adult. While the concept may be simple, it’s value doesn’t disappear when we turn a certain age. Setting financial restraints for ourselves and holding ourselves accountable to those restraints is a concept worth retaining and implementing, even for the most disciplined of Freedom Seekers.