Allowances… The genius of it is that it works well as a simple, effective financial planning tool but sometimes it becomes the bane of my existence. I first heard of this concept pre-Mrs. SSC, when a co-worker mentioned he wanted a new shotgun. He found a nice new shotgun he liked and he was debating if it was worth it, because it would use almost all of his allowance. Allowance?! What are you 12? This was my response, and also the response I get most of the time I mention my allowance to someone. He explained that with him and his wife being Dual Income No Kids, they had excess income to spend on different hobbies and activities. To make sure that their spending didn’t derail the monthly budget, and to avoid that horrid back and forth of justifying something that you want that your significant other just doesn’t understand, they implemented a no questions asked allowance. You want it, save up and buy it with your allowance. Pretty, genius. We also have allowances, and they took some trial and error. I argued for more each month, Mrs. SSC argued for less and we settled on a nice middle number. However, it took a while for me to actually accumulate any allowance as I tended to spend it as quickly as it showed up. Remember me mentioning sucking at good financial management? Seriously, I had to cut spending just to save for Christmas, and then would overspend, and end up in hock for the first months of the year waiting for the debt to be repaid so I can get back to spending again. At least Mrs. SSC was generous enough to let me overspend a little, occasionally. However, it seemed like every time I turned around something else was getting added to “That should come from allowances”. Lunches out, clothes (really clothes?), music, musical instruments, etc… It eventually turned into “If it has no value for the family or Mrs. SSC then it should come from allowance”. I liked to argue a happy Mr. SSC has value for everyone in the family by it being a more pleasant place to be. That argument didn’t fly though, so I was left to fend for myself. I realized the issue wasn’t the allowance system, because this worked well for the rest of our finances. My poor financial decisions didn’t affect any of our accounts that bills get paid from, and effectively it was separate from the family finances. I realized I needed to adjust my look at finances and how I deal with money. This ended up with me looking at my hobbies, or money drains depending on how you look at it. I implemented a 1 week rule for myself. If I wanted something, I didn’t just click “buy now” and have the retailer ship it my way, rather I put it on a wish list and would return in a week to see if I still wanted it. Turns out, I’m one hell of an impulse buyer. By being able to recognize that, I was able to turn a constantly anemic allowance account to one that generally has money in it when I really want to buy something. Also, since I now take time to research purchases and save up for them, I don’t just buy something on a whim. I would recommend it to anyone in their current lifestyle. It’s great for any income and setting. With the allowance you can have those guilty pleasure purchases without feeling like you can’t afford it, or “where will the money for the light bill come from if I buy this thing”? If someone as great at impulse buys and frivolous purchases as I am can adjust to it and learn some discipline, I think that anyone should be able to benefit from an allowance system.
Allowances for adults – probably not the most common idea. I first heard of this concept back in 2001, when a coworker of mine mentioned how he wanted this pair of fancy sneakers, but he had to wait a few more weeks to get enough in his allowance fund. I thought this was an amazing idea! I’d heard of couples splitting finances completely, except for one joint account where they each deposited enough money to cover bills. But, in my mind, the idea of a couple having separate finances seemed extreme. I’m a romantic, an idealist… couples should share everything and be open. So, when Mr. SSC and I got together and had the great merging of the finances, the battle lines were drawn. Recall, Mr. SSC had little financial literacy before meeting me, so there were some epic struggles. Luckily, Mr. SSC knew that I had more credibility in financial matters, so in the end, we peacefully settled on an allowance system. At first, allowances covered entertainment (video games, books, hobbies), they also covered lunches out, as I liked to brown-bag and Mr. SSC, not so much. Over time they evolved, and now include clothes, shoes, and girls/boys mini-vacations. Pretty much, any time we think something is unfair spending – we discuss it. When clothes got moved into the allowance system, Mr. SSC was happy… he rarely buys new clothes, which meant more money for fun activities for him. Of course, when we needed a new wardrobe he started moving up the corporate ladder, he was not happy. In the last year, we started to try to tighten down our household expenses even more, as we solidified our dream of retiring in our early-40s so that we could stay at home and raise our children. Looking at our budget, we realized eating out was a huge expense. After some brainstorming, we decided that from now on – every time we eat out, it’s a date – and one of us pays, or we go dutch. It has taken some trial and error to make allowances work for us. Our current system has been going strong for ~4 years now. Logistically – we have 3 credit cards for our family — One joint card, and then each of us has our ‘allowance’ card. I also bank online – at what was once ING Direct, and is now Capital One 360, where we have several savings accounts. We each have an allowance account, then we have our emergency account, and what I call our ‘slush’ fund. The first of every month we each get our allowance deposited to our respective accounts, and when the credit card bill comes due, I transfer the appropriate amount from the savings account to our checking account. Easy peasy! Mr. SSC just hands me his bill when it comes due – and I write the check… there is no “Oh why did you spend $49 on music this month?” or “Do you really need a new guitar?”, and I no longer feel guilty every time I buy a new pair of shoes. I’ve begun to realize that having an ‘Allowance’ system really helps with retirement planning. We are choosing to keep the same inflation-adjusted allowance in the future – and that simplifies understanding how much money you will need for clothes, or books, or hobbies as you grow older. Plus, it gives us a cushion. When the economy undoubtedly slows at multiple times in retirement, we can bank our allowances, cutting back on them, and wait for our investments to recover before withdrawing the funds. At first, I thought, perhaps we could cut allowances in retirement – but Mr. SSC wisely pointed out – we are going to have much more free time to enjoy our hobbies, so we shouldn’t cheap out on ourselves! I’m all spreadsheets – but, its nice to have Mr. SSC around to throw some reality in my face every once in a while!