Do adults have to take an allowance? 3 experts weigh in
If you’ve ever wondered if an adult is too old to give themselves an allowance, you have permission to stop asking questions now.
GOBankingRates spoke to several finance professionals who unanimously agreed that every adult should pay themselves a personal allowance. Here are the biggest benefits that come from setting aside an allowance to take advantage of it.
Discover: 9 bills you should never put on automatic payment
Looking to diversify in a bear market? Consider These 6 Alternative Investments
A personal allowance is good for budgeting
Bruce McClary is Senior Vice President of Membership and Communications at the National Foundation for Credit Counseling. McClary, who has worked in the financial services industry since 1995, said giving yourself an allowance goes hand in hand with best budgeting practices.
“Leaving room in your budget for a personal allowance supports your financial and emotional well-being,” McClary says. “While using your savings as a motivating reward system, you also reduce your reliance on credit when it comes time to use what you’ve saved.”
Those considering paying themselves a personal allowance should be able to create a plan that prioritizes their needs and keeps debt in check. McClary uses the example of the popular 50/30/20 rule. In this rule, an allowance may be part of the 30% covering discretionary expenses such as dining out and entertainment.
Remember, however, that this is a reference to a part of this category. Depending on how you prioritize the allocation, McClary said 5 or 10% can be a reasonable benchmark. The recommended 20% for savings would be for emergency funds and retirement.
Take part in our survey: do you think you can retire at 65?
It’s a life hack to have an adult allowance
Yes really. Erin Papworth, MPH, is a behavioral scientist, financial coach, and founder of Nav.it. Papworth said people who have trouble keeping track of their spending habits or sticking to their budget get Adult Allowance through a phenomenon called mental accounting.
Mental accounting explains how we categorize financial information to make decisions and how our brains tend to process different sources of money differently. This can lead to good and bad financial decisions.
Papworth uses the example of someone with $100 in their checking account. The same person also has $100 in savings. They are generally more reluctant to spend money in their savings account because that money is earmarked for a specific purpose like retirement. However, the full picture of your spending is not discussed, as you may be more likely to spend everything money in your current account. This money is not allocated like savings. Therefore, it can be considered disposable income that you think you can use without consequence. The only problem is that you might need money from your checking account to cover expenses that you haven’t accounted for yet.
This is where an allowance comes in. Papworth said an allocation from your checking account allows you to increase your mental accounting for your money by earmarking a portion of your check.
In this example, you keep $100 in your checking account, but only give yourself a $20 allowance. This means you increase your savings rate and your financial resilience.
“The key to making this work is knowing how your brain is wired and making sure your mental accounting helps you achieve your financial goals,” Papworth said.
How to give yourself an allowance
Ready to give yourself an allowance? Rivka Schreiber, CFP and founder of Flexible Finances, explains how to proceed.
- Decide in advance how much you want to spend and what you plan to spend that money on.
- Go to the bank and withdraw the money in cash.
- Spend your allowance over a designated period, such as weekends.
What if you want to pay yourself an allowance by credit or debit card? Schreiber recommends using real money. Bills will remind you how much money things cost. You will also be more likely to notice when the money starts to go down. This acts as a reminder of the exact amount you have left to spend, while you may lose track of credit card charges.
“Adults should definitely give themselves an allowance for certain things, especially fun weekend expenses that we can control,” Schreiber said.
“Out of control expenses like unexpected car repairs, skyrocketing grocery prices, and insurance rate hikes are out of our control, but we can always spend more consciously on the things that relax us and bring us joy. .”
More from GOBankingRates