Readers Question: How much money should 18 year old have? I have been thinking about this for a while and was hoping you might be able to shed some light on the subject. Please help. Thank you in advance.
There are frequent readers comments about the minimum wage for 16-18 year old
Most seem to complain about the level of the minimum wage, but when I was a lad, we used to dream of earning £3.60 an hour…
Anyway, here are some thoughts to consider.
Education is a merit good. Education has the capacity to improve life time earnings, but, young people may underestimate the benefits of studying. If students have too much money at this age or have a relatively high paying job, it could discourage education. On the other hand, if teenagers have too little money, they may feel the need to supplement their income by working for £3.60 an hour. If students spend their evenings and weekends in a bar, their education could suffer.
I teach students whose parents pay a considerable sum a year to send their kids oversees to study. Yet, for the sake of £50 a week, they spend their weekends working in Burger King or something. It seems an irrational use of time to spend £10,000 a year on education but, then sacrifice weekends for earning £50 a week.
Performance Related Pay
I often joke to my students that if they were paid £20 for doing a good essay they would do it. Paying for good reports and improvements in grades, is probably the best return on giving money to your children. But, many parents dislike the idea.
Value of Money
However, you could argue that it is good for teenagers to learn the value of money. If they have too much money given (without earning it) they may fail to appreciate the value of work and studying. Having to earn extra money may help them think more seriously about the value of work.
If you spend all summer picking strawberries at £3.00 an hour, it does create an incentive to study harder and get a degree which might enable a higher paying job in the future.
Permanent Income Hypothesis
This is the idea that someone tries to smooth their consumption patterns over the course of their life. This means borrowing in student years and saving during work period. The argument is that with a diminishing marginal utility to money, it makes sense to maintain more constant spending habits.
For example, as an 18 year old it is a great opportunity to go travelling around the world. You may have more money when your 65, but arguably when your 18 is a better time to do it.
Therefore a rational student would try to borrow money at 18 and pay it back in later life.
If a parent wished to maximise the value of their inheritance, they would give throughout their life, rather than waiting to the end and giving in a lump sum.
Well, these are a few random thoughts, when I was 18 I’m sure I would have appreciated more – but, would it have been spent on demerit goods or would it have brought a better living standard?