Allowances and Money Lessons

Allowances and Money Lessons

I’ve written in the past about our allowance system. In short, we give our kids $3/month for each year of age, and ask them to split it into three categories. 60% can be spent as they see fit, 30% goes into long-term savings (currently at ING Direct), and 10% is set aside for the charity of their choice.

This has worked well over the years, and ours kids have learned a lot about saving up for large purchases, how to negotiate and work with each other to make even larger purchases, etc. Oftentimes, the learning process is gradual, and nearly invisible. Other times, it’s readily apparent.

On necklaces and video games

Take, for example, the recent Phiten necklace craze. Over the summer, three of our kids just had to have one, so I bit my tongue one day as they each plunked down their $20 on the counter. The fourth, our 11 year old, clearly wanted one, but he wanted other things more. So he stood aside and watched while his brothers made their purchases.

Later, when we were at GameStop, he picked out a used copy of NBA 2K10. He wound up paying about seven bucks which, compared to the current version (NBA 2K11; at the time, it was $50 new, $40 used), was a steal. This is the same kids that wanted a grocery gift card for Christmas when he was five, and who had great advice for becoming a millionaire when he was eight.

Data plans: yay or nay?

Another example… Our two oldest kids have cell phones. Given that we have a family plan, the marginal cost is $10/month for basic service, and my wife and I pay for this. For anything extra, they’re on their own. In August, my son lobbied for a new, data-capable phone. We agreed – he was eligible for an upgrade, so he just had to cover the additional cost of the data plan.

He wound up getting a “feature phone” which is somewhere between a plain old cell phone and an actual smartphone. The additional cost was $10/month for unlimited data, which is not quite as great as it sounds because you’re somewhat limited in what you can do with this phone. Regardless, he now had mobile access to Facebook, YouTube, etc., and he was thrilled.

But then last night, something interesting happened. As we drove home from soccer practice, he said “Dad, I don’t think I want to pay for data on my phone anymore.” When I asked why, he replied that he likes having it, but it’s just not worth the cost.

As it turns out, he had done the math and discovered that (after taxes) that $10/month was costing him about half of the spending allotment from his allowance. And so, as soon as I get the chance, I’ll call the provider and ask them to remove the data plan.

Incidentally, when offered the choice, our 11 year old turned down the data plan, saying that he doesn’t really need it, and that he’d rather spend the money on something else.

Lessons learned

In the end, personal finance is about making choices. As you get older, the stakes get higher, but the underlying logic isn’t all that different. If you spend your money on A, then you can’t afford B. You still might be able to buy it (by going into debt), but you can’t afford it. Remember…

If your outgo exceeds your income, then your upkeep will be your downfall.

7 Responses to “Allowances and Money Lessons”

  1. Anonymous

    I’m impressed!

    Sidenote re: data plans.
    If you restrict the phone to access data ONLY when it’s in a wireless (Wifi) zone, such as many of us have at home, I think that you can enjoy some access. In my case, it’s allowing me to learn HOW to use a smartphone for getting the information I use all the time. And free Wifi zones are spreading like wildfire, so I may never need a data plan.

  2. Anonymous

    My husband has done this with our son. We were paying for everything and he didn’t seem to understand the value of money or treasure what we bought. So now he gets allowance, is required to put 20% of everything he gets into his savings account. Savings he cant touch and with the rest of his money if he wants it he pays for it. Its amazing how much is just not worth him spending his own money on.

  3. Anonymous

    What a great lesson you son has learned! Sometimes it is so hard as parents to sit back and watch your child spend their money. However, the fact that he decided on his own that the data plan wasn’t worth it to him is such a valuable lesson. Kudos to you for enabling your kids to get on the path to financial literacy!

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