Frugal Tip: Give Yourself an Allowance

When some of us were kids, our parents gave us an allowance to spend on important items like candy and visits to the arcade.  In other words, it was spending money to use as we please.  But now as adults, we make our own money and we need to decide how much of it goes towards discretionary spending.  For some, it’s difficult to distinguish between discretionary, saving and expenses which is the reason for the insane amount of debt held by individuals/families today.

The key to successfully implementing frugality as part of your lifestyle is to ensure that you never feel deprived.  How do you save money but still spend money on the little things in life without feeling guilty for breaking the frugality rules?  Give yourself a set monthly discretionary spending allowance!

Frugal Tip:  Give yourself (and spouse) a monthly allowance to spend as you please.

As we advance in our careers and our salaries, it’s easy to spend more money as more of it is available to spend.  Using this allowance system will help keep the frivolous spending in check and help increase your savings.

This strategy works great if you are in a relationship with combined finances.  After household expenses are taken care of, it sets equal spending limits for both partners and allows buying items with no questions asked.  For our family, we each get $100/month in cash to spend on whatever we please.  Any unused cash can be saved for slightly larger purchases in the following months.

Do any of you use this strategy?

photo credit: John-Morgan

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Dharma
12 years ago

Our family just started doing this a few months ago. My husband and I each get $40 a week for “frivolities” and we refer to that as “Mad Money”. Because we don’t go over and because we still get to have our own *secrets* (yes I am refering to 1pm Coffee Crisp bars) we don’t argue over money. This has reduced our cash spending by 75% per month. I can tell you we have a lot better things to do with that income.

Our children receive an “Allowance” at the beginning of the month $30 for the 7 yr old (based on $7.50/wk) and $50 for the 12 yr old ($12.50/wk). They are required to decide how much to put into the bank as savings and they know it has to last the month….no more crying and whining at check out counters, they have their own $ to spend and now when it’s gone….it is gone. Case closed :)

Aspiring millionnaire
12 years ago

Yes. I use the allowance approach, but I mix the fixed and discretionary amount. I take a fixed sum (larger than the fixed expenses) once a week, and I need to manage the week with that amount. It includes food, dining, clothes, electronics, etc. etc. It is simple, and it works for me.

Gates VP
12 years ago

Boshden, Scott’s right about the over-spending thing. My father was talking about the RRSP pool shrinking in the 90s. Which is to say, it’s been around for a while (and it’s not just an American problem).

However, the last couple of years have really exacerbated the problem b/c the US (as a country) hasn’t balanced a budget since the Clinton years.

And saving 70% of your disposable income is scary in lots of ways.
1. It doesn’t scale over time.: you can’t save that much money for the rest of your life. It sounds like a “diet” decision rather than a “lifestyle” decision. If you do manage to save 70% of your disposable income for the rest of your life, you’ll die with a bunch of unused money. That doesn’t really connect with the common man.

2. It doesn’t scale over people.: If everyone in the US did what you do, the US would have a whole different set of problems. Look at what is happening to the Chinese with their 25%+ personal savings rate and you’ll see what I’m talking about. Having a population saving 70% of their income is so obviously wrong that it doesn’t connect with the common man.

3. It can’t be done with a median income: If you took the median US family income and then stripped it bare of anything that wasn’t a long-term health requirement, you still wouldn’t be able to make the average family (not just person) save that much money. Again, your number fails to connect with the common man.

So Boshden, bully to your for your successes, but please realize that you just seem like a crazy person to the “common man”. This means that no one is going to “get behind you”. No one is going to tell all of their friends I want to live like Boshden, b/c it just doesn’t make any sense to them.

Scott
12 years ago

Two things, Boshden:

1. You “JUST realized that Americans are spending way beyond our means”?!?! They/we have been doing it for YEARS! And you JUST took notice? BTW, American savings are back “up” to around 3% — it only took a global economic near-collapse to make that happen. Go Yanks!

2. Congrats to you and your high horse for saving all that disposable cash. Now I know why it took you so long to take notice of worldly affairs — because you never leave the house and don’t pay for cable! Paying rent and saving isn’t much of…anything.

Apologies to you and the other users for the “attack” but come on, listen to some wise old men and they will probably tell you that you can’t take it with you. It’s called “disposable” cash for a reason, not “hoarding” cash. Try saving 65% and go out and blow the other 5% on life and living! Go have a beer! If you are saving up for a down-payment then have a beer and return the empty.

In a Capitalist society, it really IS all about money, but life ISN’T all about money.

Boshden
12 years ago

I’ve recently just realized that Americans are spending way beyond our means. I was astounded by the personal savings rate, which is the percentage of disposable income saved, to be around only 0.3% for the past few years. What’s evening more alarming is if you take out the top 1% earners who make tens of millions of dollars a year, the average American acutlaly has a negative savings rate! I became to examine this problem, and I think the following is a pretty good illustration of the problem:

The typical pair restaurant goer orders an appetizer each costing at least half to 2/3 as much as the entrees. They also order a drink or two each. Add the two entrees on top of that and desserts, and you have a hefty bill. The worst part is, the pair rarely finishes all the food, and in many cases, a major portion of the food is still left uneaten.

It’s no wonder the United States only has 5% of the world’s population, but consumes 50% of the resources!

I, on the other hand, am on the other extreme. I save about 70% of my disposable income after paying for rent.

Karen
12 years ago

My husband and I just opened a shared account due to the fact that we also recently purchased our first home even though we have been together for a very long time. We’ve always been responsible for various shared expenses and this varied on whose income was higher over the years.

Sharing money is definitely a learning experience…. What we’ve decided is to put a percentage of our incomes into our shared account for shared expenses & savings. This is due to the fact that we have really different incomes and we also cannot understand each other’s spending habits (me on food & fashion, him on big ticket items and sports). We decided the best way to avoid fights about money was to do it this way. We have barely had any fights over money in the 8 + years we have been together…

On the other hand, we know quite a number of people who pool their money and have allowances and it feels like all they seem to do is to fight about money. But perhaps this has more to do with their personal budgeting than anything…

I think every couple does what works best for them…

Telly
12 years ago

My husband and I have bi-weekly allowances as well but I’m kind of embarrassed to say how much because the number is significantly higher than the numbers being thrown out here. But like GatesVP’s situation, ours includes all discretionary spending, including dining out, clothing, etc.

SmileS, oddly enough, while my husband has been eating up his spending money, I have a few hundred dollars sitting in a savings account to be used for Christmas gifts.

David
12 years ago

My wife and I give each other a weekly allowance of $75 each. We can spend it as we please. This is “me” money, spend it on things for yourself. That includes personal entertainment, clothing for yourself, eating out by yourself, sports, etc. Or save it up for something bigger.

Our paychecks go into a joint account that pays the bills and savings.

Peter
12 years ago

Good post. My wife and I have been giving ourselves an allowance for a few years now and it has worked well. We both get the same $40 every week so there will be no disagreements based on income. The money goes into separate chequing accounts that we can spend as we please with no questions asked.

So far so good… but we will have to look at this again when we have children. Just one of a number of things that will need a major adjustment. :-)

MikeG
12 years ago

Alot of people are mentioning that an “allowance” is demeaning or childish. A budget is another word for an allowance, when you buget for something you set how much something is allowed to cost. Allowance just has other nuances and memories attached to the base meaning of the word.

We were really unsure of how much discretionary spending we were doing, and it always felt like my wife spent too much. We implemented the $40 ea. a week (Cash) “allowance” and funny enough, im usually spent by the end of the week and she still has a $20 or more.. hrm not as frugal as i thought, it’s all that Subway and sushi I eat :).

We’ve also committed to keeping our budget line items, which means if something comes up that is not in the budget, the discretionary is spent. We find alot less “needs” coming up now…