To pay or not to pay, that is the question.
On the heels of my TEDx London Business School talk now on YT, I’ve been getting lots of questions about how we do allowance in our family.
And truthfully, the answer would’ve been, not well… up to just a couple years ago, but in preparation for my talk I dove headlong into allowance programs that work with kids, how much to pay, what to pay for, if chores are tied to pay, etc.
But before I dive into the mechanics of how and what we pay our kids, let me first cover why I think this concept is so important and worthy of a listen.
At a money smart week event where I was presenting a father in the audience asked what to do about his 20 year old daughters who texted him every time their checking accounts were out of money. He said the texts would come in every week to 10 days, but that they had been given enough money to last for a couple weeks or more. When I asked him what he does when they text he said, “well I put money in their account” — which prompted my question — why do you do that? He said, “well I don’t want my girls to struggle.” At which point I asked everyone around the room, “did you struggle when you were 20?” “did you struggle when you were 20?” And everyone around the room nodded in agreement.
To be perfectly clear, I don’t want my kids to struggle financially or otherwise… but my Dad always said of my sister and i that he was raising adults, not kids. He trusted us with information, allowance, and making big boy and big girl decisions. Sometimes with not so subtle guidance and sometimes with just a correcting suggestion.
I truly believe kids today need to handle “real” money — tangible cash — before they’re entrusted with debit and credit cards, apple pay, google wallet, bitcoin or whatever the newest payment craze will be. As I mentioned in the TED talk, kids today are living in a world of financial abstraction, a world where money is largely an illusion with very real consequences. And the earlier they start the money handling process, the better.
So, the biggest question about allowances is usually how much do I pay? And Suze Orman, Dave Ramsey and all the other financial pundits will probably tell you the ‘hard and fast’ rules of allowance, but in reality, it’s entirely subjective to how your house works, what the kids currently do, what the parents pay for presently, and what lessons you’re looking to teach your kids.
Our amount is simply $1 per year of age per week. So our 13 year old gets $13/wk, the 11 year old $11, and the 9 year old $9. Our logic was the older they get the more they’ll be involved in after school events with friends, so having a little extra would go to those activities.
The kids get their allowance every Saturday morning and a big production is made of managing the money they get. We operate on the 10/10/10/70 rule. 10% of what they get goes to each of three categories: Savings, Giving, and Investing. The 70% remaining is theirs to spend. Each of the categories has with it a mason jar with a label. Common practice is to have the money in something visible so that the kids get excited about seeing the jar fill up.
They can put more in any of the jars, and I’ve implemented the family 401k plan where whatever they put in the investment jar, I’ll double at the end of the month. About every quarter when there’s enough in that jar to amount to anything, we put the money in an Etrade account in their name and decide on what to buy. Typically it’s either mutual funds, or stocks like McDonalds, Walmart, Coca Cola, or some other dividend paying stock that they’ll be in for the rest of their lives. I’m attempting to teach them about income producing assets and the idea that your money can make money. The doubling of investment account money is meant to teach them delayed gratification — as in, if I don’t spend some of my spend money, mom and dad will double it allowing me to make more money over time.
The Next Rockefellers
We’ve adopted a page out of John Rockefeller’s playbook as well, though not to the extent John did. Every week he would give his kids a quarter and they had to track giving, spending saving and investing in a double entry bookkeeping journal. If they couldn’t account for every penny spent during the week, they would not get their allowance the following week. This obviously was to teach them accountability with their money. In our house, on distribution Saturdays, I’m keen to know how much they have in their wallets, and where the money went from last week to this week. In a sense, I’m wanting them to pick up on the fact that they should be tracking what they spent, where they spent it, and what they spent it on.
When it comes to determining what they’re spending their money on, any amount in the spend category is theirs to determine. We’ve reserved the right to tell them no you can’t buy that candy because you’ve had so much sugar already today, but if they want toys, clothes, shoes or miscellaneous junk, it’s their money to spend, we just encourage them to think through what the cost vs benefit might be to them. All in all, they’ve become more conscious of what they’re spending money on, especially since mom and dad aren’t footing the bill for frivolous things.
We have yet to formally announce this change, but as the kids get older and begin asking about camps, athletic events, friend’s birthday parties and presents, and other larger purchases, we’ve decided that they’ll cover a percentage of the cost. Athletic participation is 10% of whatever it costs, so the $200 baseball season is $20 out of my 7 year olds budget. A year of swim team that costs $400 requires $40 from my daughter. Birthday presents are usually split half and half. If you want to give your friend a $20 basketball for his birthday, pony up $10 or find a coupon at Dick’s Sporting Goods to make it less. All of these becoming learning lessons.
Here’s the key to the allowance system working..
- It has to be consistent. A start and stop allowance program is doomed because the kids won’t take it seriously and it’s effectiveness is determined by the sheer volume of lessons that can be taught over time.
- It has to be transparent. We’ve gone so far as to create contracts with our kids so that they understand exactly what’s expected of them and their money. You signed a lease or a mortgage, right? They expect to get paid. You know that. Makes things pretty cut and dried. You don’t pay, you don’t stay. It’s simple.
- It’s founded on mutual understanding and mutual agreement. My wife and I have been discussing the parameters of allowance for some time. If we don’t agree fundamentally on how it’s set up, it just won’t work.
- The amount of money is not the most important thing… it’s the fact that the kids get real money experience and the decision making is shifted to them.
One of the major questions that is asked is… should it be tied to chores. Again, a very personal decision. In our household, the allowance system is “loosely” tied to a list of chores and jobs that the kids have to help the house run smoothly. It includes:
- making sure the dog is fed, has water, is let out, and poop is scooped.
- making sure laundry is put away, and when asked that you help fold it as well.
- practicing piano (with no griping).
- finishing homework each night.
- helping pick up the house, yard and rooms every day
- emptying the trash
- emptying the dishwasher
- and, we’re implementing a Kids Dinner night where one night a week, the three of them cook dinner (with supervision of course).
The point of tying money to chores is alleged by some so called gurus in the space to impact work ethic, as in — do work, make money. The more I work, the more money I make. Our children have a good work ethic already, so we reserve the right to withhold allowance if they’re not fulfilling their assigned duties, but it’s not like you didn’t practice yesterday so that just cost you a dollar.
One of the unique ideas we did with our kids was making an issue of them having an emergency savings fund. They each had to have a certain amount in an emergency fund by the time they were 5. At 5 it was $300, at 7 it was $400, and by 9 they had to have at least $500 in an emergency savings account. Anything over and above that amount I encourage them to invest. Now you may be asking why would any 5 year old need an emergency fund, and my answer is they wouldn’t. But if they have an emergency fund at 5, they’ll have one at 10, at 15, at 20, 30, 40 and 50. It’s a scary number of people in America who literally have no savings whatsoever. This is a behavior thing, pure and simple.
I hope the example of our allowance system helps in your current or future family planning. I read once that it takes 2 generations to create a Rockefeller type fortune. My question is are you generation #1 and are you teaching your kids to be Generation #2?
Here’s to you Raising Money Savvy Kids — check out the free webinar on the topic HERE.
