Many families teach children about money management and responsibility by offering them an allowance but what about adults, should they have one too?
An allowance (for those of privilege reading) is not an imaginary thing but rather a pre-set small sum of money a child receives regularly to spend on new toys, clothes, books or whatever. It could be a weekly, bi-weekly or monthly payment depending on how the parents set it up. Think of it as a trust fund, without the fund or all those extra zeros.
Allowances teach children to save and plan for purchases and form the foundation of a valuable life skill, one that many adults really need.
Adult Americans are burdened with debt and collectively show a much greater ability to spend than save. It’s estimated that over 40% of American families spend more than they earn and nearly 50% have less than $10,000 in retirement savings. These two points alone say just about all there is to say about adults needing an allowance. In fact, your six-year old is probably better at saving money than you.
"There are only two ways to balance a budget: spend less or make more"
However, making more money doesn't seem to help. Most people seem to increase their spending in order to maintain a standard of living they "believe" they should have, regardless of whether they can afford it. People upgrade to a bigger house, newer cars, buy a treadmill for home, get a 60 inch plasma TV or just about anything a larger budget allows. This only results in ever-increasing debts for many rather than debt reduction or investment in a more stable financial future.
Why do people live beyond their means?
Financial responsibility is a skill that people must be taught, and many just never received that education. While some children quickly learned how to save up an allowance for major purchases, most kids learn a more immediately-satisfying method: Spend your allowance on whatever you want to buy right now. Unfortunately, many people never seem to get over this mindset, and continue living from check to check as an adult. Whatever money is left over after the bills are paid is free to be spent on entertainment, new clothes, restaurant meals or other additional expenses.
For members of the working poor, the sheer cost of survival may be very close to their total incomes. For example, food and gas prices are the same regardless of a person's income, so the poor spend a higher percentage of their paycheck on feeding their families than people with higher incomes do. People who grow up in this sort of hand-to-mouth lifestyle may not know how to handle extra money; so much of their income must be spent on the necessities of life that they're not accustomed to seeing money in the bank between paychecks.
When a person manages to break into the middle class, they may still be accustomed to living at a lower income. The extra amount of money in the bank may make them uncomfortable, or they may feel that they owe it to themselves to improve quality of living now income has increased. After all, they have earned the money, and a reward sounds like a good idea.
Unfortunately, these “self-imposed rewards” are rarely a one-time thing. Typically the more extra money comes in means the more that is spent. Once a person has entered this mindset, it becomes increasingly difficult to put a cap on spending. Cash back credit cards, store financing, 50% off sales and more all make it far too easy and tempting to buy things you really can't afford. Financing even seems to make sense when in reality it costs substantially more. The average person's brain is wired to absorb interest fees divided over several months or even years as more acceptable even as they bleed a person's wallet dry.
Allowances for Adults: Going Back to Basics
Many couples set up allowances as a way to reduce conflict over finances. After all of the household expenses have been paid, each member of the couple gets some money to spend on whatever he or she would like. Some people handle this through an envelope system, whereas others maintain separate bank accounts for family money and spending money.
Allowances are more than a way for couples to divide spending, however, and single people can benefit from having an allowance as well. Allowances differ from tight budgets in that the money placed in that fund can be spent in any way a person chooses; rather than dividing spending into multiple categories, an individual is able to spend the money in his discretionary fund however they like.
For example, a person's budget may have categories for out-to-eat, entertainment, new clothes and books. By combining all of those categories under the single heading of "spending money," a person has more freedom and flexibility. The simplified budget will be easier to track, and a person has the choice of how and where to spend his extra money.
Having a budget forces someone to be accountable for their spending. If an individual pays for things entirely in cash, it's impossible to spend more than they earn. Placing spending money in a separate allowance makes it possible for a person to know exactly how much money is available so that they can plan purchases accordingly without guilt or unpleasant surprises.
Of course, a budget only works if a person sticks to it, and a person needs to enforce his allowance in order for it to do any good. If an individual has $100 to spend one month, and he wants to buy a $150 eBook reader, he can't borrow that $50 or spend it on credit. He has to save his $100 and wait until next month to buy the new toy, or else find a way to buy what he wants for less.
The other key step to implementing an allowance is leaving room in the budget for savings, even if it's a very small amount. It doesn't help a person much to allocate every cent of his after-bills income as spending money. A percentage of it must go into savings or investments where it can begin to earn more money. This can help a person put money away for retirement, save for an emergency or help build savings for a major purchase like a home.
Aside from their incomes, the primary difference between the rich and the middle class is spending habits. Wealthy people set aside as much as 20 percent of their income in savings and investments rather than spending every cent they earn. They also live within their means by buying things in cash rather than financing them. Of course, "within their means" for a millionaire might include a Ferrari or a mansion. What's important is that a wise millionaire only makes purchases that he or she can genuinely afford.
People of all classes can learn something from this mindset. Stop allowing finances to be guided by insecurity and a desire to keep up appearances. Instead, focus on making wise purchases and setting aside money out of every paycheck. While this means doing without some expensive toys and gadgets in the short run, your overall financial health will reward you in the not-so distant future.