A recent post over at AllThingsFinancial prompted me to reassess the way we handle our kids’ allowances. Thus far, we’ve been pretty lax/inconsistent about allowances, and our oldest son has recently been agitating for a more reliable stream of income. After mulling it over, we’ve settled on a new system.
We’ve decided that, once our kids hit five, they’ll receive $0.50 per year of age per week, broken down as follows:
30% spending money
30% short term savings (e.g., a video game, pricey toy, etc.)
30% long term savings (e.g., a car, college, retirement, or some such)
10% to the charity of their choice
So our seven year old pulls down $3.50/week, with $0.35 going to charity and $1.05 going to each of the other categories. Of course, he’s free to ‘upgrade’ money from spending to short term savings, short term to long term, or any of the above to charity. We’ve set up containers for each category, and will periodically sweep their long term savings into an online bank account such that they can login every once in awhile and look at their money. As their savings continue to grow, we’ll be investing it on their behalf. We’re leaving the destination of the charitable contribution up to the kids. Our seven year is currently thinking of the Salvation Army, whereas our five year old wants to donate to the Red Cross since they helped so much with the tsunami. Once they’ve save up a few bucks, we’ll send it off.
It already looks like this will be a great learning experience for the kids. Our seven year old has gotten interested in how banks work, why/how they pay interest, etc. and our five year old is getting some good math practice as he figures out how to make change on payday. And both are starting to learn how to set financial goals and how to save/budget to meet them. In fact, our seven year old has his sights set on a portable CD player, and I’m sure that he won’t spend a cent until he has it — he’s a born saver. Our five year doesn’t have a clue what he’s saving for, although the release of the Star Wars III has him thinking about some new Star Wars toys.
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We do something similar with our oldest. He receives $12/week paid every two weeks. It is super easy for me as I just direct deposit it from my paycheck into his account. He has a debit card that he can use at ATM/merchants. We have been doing it this way for about 4 months now and he is learning a great deal about being responsible with money and his debit card.
We used to do the system where I just held the money until he wanted to buy something, but that got to be a real pain when I didn’t have enough cash. Also keeping track of the withdrawals with 2 parents was a real hassle.
Lastly, we give the money freely with no strings attached. I know I don’t like the IRS forcing me to “save” 12% for Social Security, so why should I force my son to save money for some distant what if. The reason why we give him an allowance is so he can make mistakes with money before he gets out on his own.
Thank you for spreading these valuable tips. Financial common sense is an underestimated skill that all children should learn and I like your idea of having a portion for donating as well as spending and saving.
In our case, we have a similar plan and also pay interest as John mentioned. Every month we count the money in our 4 year-old’s saving pot and then I give him an additional 1% of the total. Not only can he see how compound interest works but he’s also learning maths and record-keeping skills. Hopefully this will be a good foundation for when he’s more financially independent. Details of our scheme are here:
http://www.dadcafe.co.uk/articles/make-your-child-rich.php
Of course, leading by example by being sensible with money yourself is also hugely important.
My wife and I created a show, “The Money Mammals” for young kids to help instill the value of money. We teach them to “Share & Save & Spend Smart Too!” We’ve done a number of events at schools, community centers and stores and kids get to make their own clear banks – I think this is essential so they can see their money growing. Young kids really get the idea and are knowledge sponges. If advertisers are going to target our kids at two, we need to fight back.
We encourage kids to have a Share, Save & Spend Smart bank. I like David Owen’s approach in his book, “The First National Bank of Dad.” Give your kids a decent enough size allowance and consider a high rate of interest to exaggerate the power of saving (the amount is up to you, but $1/week may not be enough). 3% on $5 to $10 (or even $50) may not necessarily accomplish what you want it to – to teach your kids that saving can really pay off.
-John
We give our kids allowances and don’t tie it to chores. We agree with chores being “a part of life” and didn’t want the kids to not do their chores if they felt they could do without the money. 🙂 That said, we still wanted to teach our kids fiscal responsibility and realisticly realized that we were already spending money on our kids so we simply turned some of that discretionary income over to them in the form of allowances. That is how we determined how much to give them was based on how much we were spending on them to begin with. We feel that when it comes to money, setting a good example of being responsible and consistent is important. One of our biggest challenges with allowances was paying it out on time. We would either forget or not have the right amount of money on “pay day”. Then we started using online piggy banks at http://www.littlemoneybags.com. Their online piggy banks track our kids’ money (like an online bank account) and we hold onto the money until the kids actually need it. Best of all it automatically deposits allowances into the kids accounts on time every time! We are now ultra-reliable and we hardly have to think about allowances at all.
I did allowance in a very similar way with our four kids, the youngest now 15. Chores were done because we all live there and help out. And we all share in the family “wealth” too. We added one other envelope and that was for gifts. That way they are thinking about their family members too and have something set aside when those birthdays come up. Also, having allowance small enough motivates them to go out and earn money when they become old enough (not that big allowances were even an option for us). They all sold lemonade in the summer until old enough to babysit and mow lawns.
I don’t have kids, but I think it’d be hilarious to see my kid have a credit card, which he uses to get cash back! Of course, he’d never be allowed to carry a balance.
I pay my 9 year old by cheque which he then takes to the bank machine to deposit. He has a debit card which he can then use to buy things. We can check his balance online as well and he gets a bank statement. This shows him how the real world works and also makes it less likely that he will waste money on small stuff or lose the small change.
I like the idea of having your kids do a set of chores to help out the family with no money paid. They receive money for things done around the house above and beyond these chores. An allowance is not given just because of an age. This makes kids feel they are entitled to something for nothing. I know you say that their allowance will be taken away if they do not help out, but this only teaches the negative. I think this way they learn that work equals money not age equals money. In addition, I agree with kids having to split the money into buckets, just like we do with our income.
SSS
Looks pretty good. Every parent needs to make it work for them. We went with the $1 per week for their age. However, now we don’t buy them anything extra when we go the grocery store. I figure it works out to about the same. Also, we are capping it at $10 per week.
Good job. Stick with it and your kids will start to understand how money works and power of their choices.
JLP
$0.50 just seemed like a good place to start. It seemed excessive to give a first grader seven bucks a week ($1/year) yet, if we set it too low, then he wouldn’t make sufficient progress toward his savings goals and might get frustrated. Also, for the 30/30/30/10 split that we do, the math is very clean if apply it to whole or half dollar amounts. Thus, the kids can do the math themselves and they get a good lesson figuring out what they’re getting, how to change in their coins for bills, etc.
As far as what they have to do to earn it, I’m not completely comfortable paying kids to do things that they should be doing anyway. We’ve made clear to them that they have to help out around the house whether or not they’re getting paid — it’s part of being a family. So we haven’t made an explicit connection between household duties and allowance. That being said, I wouldn’t hesitate to suspend allowance payments if they started majorly slacking off and/or refusing to pitch in.
We do a similar thing but use three pots — church, spending, and bank. Haven’t yet set an amount per week, but the kids seem to be money magnets (birthday gifts, holidays, etc.) so that’s not a big deal.
How did you settle on $0.50? Is there a minimum level of help they have to provide around the house to get this or do they just get it automatically?