The ins and outs of allowance
Healthy finances - March 2005
Monday, February 21, 2005
Allowance, done well, is one very good way to help prevent the dreaded “E” word– entitlement–from becoming a part of your child’s approach to life. After December’s column on allowance, I received a number of questions that will help all of us continue to work through this rite of passage:
Q:At what age should you start allowance?
A:Middle school is the right time to introduce allowance. In middle school, your child can easily manage one month’s worth of expenses. Sit down with your child and agree on three expenses he or she will manage.
One reader rightly pointed out to me after reading my December column that girl expenses are very different from boy expenses. She says that if her son were given an allocation for clothing, he would simply wear the same clothes for the rest of his life. Ditto on an allocation for “toiletries.” Point taken. The list should be unique and specifically tailored to your child.
Once the list is created, estimate what you spend per month on these items. Hand over that amount and responsibility for the expense.
Don’t forget the allowance contract. Spell everything out in writing. Both of you should sign on the dotted line before any money changes hands. Remind your child to keep all receipts. Make this a requirement for the next month’s payout. This is another chance to stop and think about money.
The dollars are significant when you’re talking about covering an entire month. Many parents are not sure about giving their kids that much cash. (My own father called to check on my sanity when he read that I give my girls $80 a month for allowance.) I assured him that giving the girls $70 for “clothing and accessories” expenses saves me money (not to mention that I no longer have to say “no” all the time) and helps them prioritize.
Q: Should I pay my child money for chores?
A: That depends on what you’re trying to teach your child. If you’re trying to teach your child how to manage money, then no. But, if if you’re trying to teach your child how to earn money, then maybe.
A word of caution when you use the money-for-chores approach to teach the concept of earn. You put a price on every chore you want your child to do the moment you pay them for any one chore. No parent really intends to pay a child for everything they do to help out at home. However, the minute you assign a dollar value to one family chore, you open yourself up to that for all family chores.
If you want to teach your child how to earn money, teach them the old-fashioned way—lemonade stands for the youngest children; snow shoveling or babysitting for older children.
And don’t stop the allowance when your child hits high school.
Most of the teens I interview tell me they received allowance in middle school, but not anymore. Some teens have jobs, and allowance stops because the teen is expected to use the money he earns to cover his needs. Other teens tell me that their parents view school as their main job, and if the teens need money, they ask their parents for it.
Those same teens will be managing day to-day life completely on their own when they get to college. They will try to live as they lived at home–but with fewer resources. It is no surprise that many of those same great kids get in over their heads using credit cards to make ends meet in college.
Keep using an allowance for expense management. Add expense items, don’t eliminate them. Work up to your teen managing one year of expenses by the time she graduates high school.
Then help your child manage all of her money in the four primary categories: save, spend, donate and invest. Continue to drive home “save” with the “pay yourself first” ritual. “Invest” can be their contribution to a college fund, car insurance or even their own Roth IRA.
Let your teen run out of money while he still lives under your roof. Help him work out strategies for shortages in the high school years. A college student’s strategy for short falls is credit. Not good.
Q:When I start my older child on allowance, should I start the younger child at the same time?
A:No, this will dilute the importance of this rite of passage for your older child. The older child has earned the privilege. The younger needs to wait—and watch, listen and learn. Oh yes, the younger child is WATCHING.
I made the mistake of launching both my girls at the same time. My oldest was put out, because, as always (in her eyes), my youngest did not have to wait. I lost out on being able to leverage the education she would have gotten simply by watching her older sister navigate the waters of her first allowance.
Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the skills of basic personal finance, www.MoneySavvyGeneration.com. E-mail her at Susan@MSGen.com.