There have been many blogs that deal with allowances, how much to ask for, and how often. I won’t talk about that today. I would rather deal with the topic of what to do with this allowance once you have it in your hands already. It is a popular stereotype that young people can’t hold on to their money. I don’t believe that for a minute, I just think that in our country we don’t give financial education much attention and instead we let people figure it out on their own. When was the last time you saw a class in high school or college on money, debt, saving and investing? I think a class on this topic should be mandatory (a pet peeve of mine).
Let’s say your SD gives you $2k in cash each month and that your relationship lasts one year. That is $24k in cash. Not a small amount. Your next steps will depend on your individual circumstances. But here are the main things you can do with this money, provided that you have already taken care of your basic housing and food bills:
First, let’s talk about paying down debt and we can discuss investing in future blogs.
If you have a credit card that charges the typical 20% annual interest, you NEED to pay that debt down, and you need to pay more than just the $25 minimum each month, otherwise high interest on the remaining balance on your debt will compound and accumulate. If you keep charging on this card and only paying the small minimum monthly required amount, this means that your debt will never be paid off. Ever…
I think the best strategy is to divide your debt into smaller amounts. Instead of looking at a large $10,000 balance (which could be pretty daunting) it is easier to divide it up mentally in smaller and more manageable amounts. Say for example you just added $400 to your existing credit card balance because you bought college textbooks. I would recommend the next time you get your allowance pay down that full $400 balance before you do anything else. If you can’t pay it in full the next month, at least set the mental goal to pay it down as soon as you can. This way, no interest or very little interest will accumulate on that specific balance. As well, you will now feel more confident and relieved that you able to start dealing with the debt monster, and this will make you more confident to start paying down even more debt in the future.
Pay down the debt on the card with the highest interest rate first: This one is pretty obvious since you will want to get rid of as much extra interest payments as possible
Transfer your high-interest balance to a lower interest rate credit card. If your balances are large enough perhaps you can transfer that to a card with a 0% promotional interest: Some credit card companies offer these promotions at times, so be on the lookout for special offers like that. You might be able to save some money this way.
If you have several credit cards, consider paying off the one with the smallest balance first. This way you can claim a small victory against debt, and then proceed with slaying the larger balances.
So, if you follow the simple steps above, paying down debt becomes a virtuous cycle that will make you breathe easier. Bear in mind you may need to sacrifice a bit: Cut some dining and entertainment expenses in order to budget more for debt repayment. The main point is to give each dollar you earn (work or sugar allowance) a purpose. You will find out that when you get organized about that dollar, you have less time for impulsive spending. And impulsive, disorganized spending leads to debt as night follows day.
You may have noticed that some of the pointers I have offered are actually mental tricks to get you to focus on small steps, small victories and conditioning yourself to live within your means and making every dollar count with a purpose to make you more independent
The benefits of being disciplined and debt free is worth it, your future self will thank you!