What is a Personal Allowance and How Can It Improve Your Budgeting?

When it comes to budgeting, many people focus solely on paying bills and saving for the future. But let’s be honest—this can sometimes feel a little bit… blah. And this is probably where budgeting gets its bad reputation. Where’s the fun? Well, budgeting doesn’t have to be all about sacrifices. That’s where a personal allowance can come in to save the day. 

What is a Personal Allowance?

 A personal allowance is a set amount of money you allocate each month for non-essential spending. It can be used for: 

• Dining out or grabbing coffee
• Buying a book or hobby supplies
• Treating yourself to fun activities

Even setting aside $5 to $10 a week can make a big difference. The goal is to allow you to enjoy life without negatively impacting your overall financial goals.

Why You Should Have a Personal Allowance

A personal allowance is crucial for maintaining financial well-being. Here’s why:

1. Prevents Overspending

Having a set amount for discretionary spending helps curb impulse buys and keeps you within your budget. This is often because it loosens the restrictions you would feel by otherwise keeping such strict parameters on your finances. 

2. Balances Fun with Responsibility

A personal allowance lets you enjoy the things you love—like dining out or hobbies—without compromising your financial stability. It helps answer the question “Does this bring me joy?” 

3. Improves Budgeting

Allocating a portion of your income for fun ensures you don’t dip into savings or essential funds, improving the overall structure of your budget. It makes you more mindful of your spending decisions, helping you stay disciplined and prioritize your expenses.

4. Supports Long-Term Goals

While you’re enjoying life now, a personal allowance ensures you can still save for future goals like building an emergency fund or retirement.

5. Promotes Financial Harmony with Loved Ones

A personal allowance is also key to avoiding money conflicts with loved ones. By setting aside a specific amount for personal, discretionary spending, you create clear boundaries for what you can spend without impacting shared finances. This prevents the stress of constantly negotiating over purchases and helps avoid misunderstandings. Having a personal allowance allows you to enjoy your own spending habits without guilt, while also maintaining harmony in your relationships.

How to Set Up a Personal Allowance

Here’s a simple step-by-step guide to setting up your personal allowance:

1. Assess Your Income and Expenses
   Take stock of your income and essential monthly expenses (e.g., rent, utilities, groceries). This helps you determine how much you can allocate for discretionary spending.
2. Determine Available Income
   Subtract your essential expenses from your total income to figure out how much you can comfortably set aside for non-essential purchases.
3. Set the Allowance Amount
   A common guideline is to allocate 1% of your take-home pay for discretionary spending. However, adjust the amount based on your financial situation.
4. Adjust as Needed
   If your income or expenses change, be sure to adjust your personal allowance accordingly.

Tips for Success

To make the most of your personal allowance, follow these tips:

1. Stick to the Limit
   Use a separate account or a budgeting app to track your spending and stay within your allowance. Don’t go over the limit or be tempted to “borrow from next month.” 
2. Prioritize Meaningful Spending
   Spend your allowance on things that truly bring you joy, such as hobbies, meals out, or activities you love.
3. Track Your Spending
   Regularly review your spending habits to ensure you’re sticking to your personal allowance and avoiding overspending.

Why a Personal Allowance is Key for Financial Balance

A personal allowance is essential for balancing enjoyment with financial goals. It allows for short-term fun without sacrificing long-term savings and promotes harmony with loved ones by reducing money-related conflicts. Start your personal allowance today to enjoy life’s pleasures while staying on track with your financial goals.

Rochelle Allen, AFC, Program Coordinator for Empowering Financial Wellness