I know what you’re thinking, “This guy’s crazy, how on earth can a 9 year old kid manage a $90 / week allowance?” And you’re right! There’s no way he can do it on his own…. but he’s getting there, and learning more everyday.
We all want our kids to be money-smart. Not teach them to be rich, but to be smart with money, so that they can plan out and achieve whatever it is they set their minds to, and hopefully avoid massive and crippling debt. To that end, I started giving my son an allowance when he was 5. I read a number of parenting blogs online and most talked about the $1 / year of age “rule”. My wife and I decided to follow that, and we would split the allowance in half. Half would be granted and half would be comprised of chores. Chores is kind of a misnomer, he wasn’t mowing the lawn, but more for things like helping to set and clean up the table for dinner. And it was more based on attitude than it was accomplishment.
We kept doing this until he was 7, but we found two problems with this:
- When we were at a store and he wanted to buy something with his money, he never had his money with him, so we’d do this “swap” deal… we’ll pay for it now but he has to pay us back later. But we would rarely have him pay us back… and he caught onto this pretty quickly.
- He wasn’t actually *doing* anything with his money. He had no specific savings goals, he had no responsibilities to, for example, pay for his own popcorn at a movie, etc. It was just this small pile of money growing *very* slowly every week and he was learning nothing about the realities of managing money in the meantime.
I couldn’t see how this was going to make my kid money-smart, so I started to read more about kids and financial literacy. I learned that at my son’s age, the most important thing we can do is to create an environment for him in which he can learn “financial socialization” skills. This means, that we should talk to him about money, make him ask questions, and give him some responsibilities with money so that he can learn about it by talking through decisions with money with my wife and I. The goal is simple, if a kid learns how to communicate about money, it takes the fear out of dealing with financial problems when they are older. And, the reality is, we’ll all hit some sort of financial distress when we’re older, whether it’s a divorce, the loss of a loved one, you name it… life happens.
That’s when we decided to:
- Create an environment where we have no choice but to talk about money together.
- Change the situation into one which gives him meaningful responsibilities so that we have to talk about money together.
- Put everything in the bank and get him a debit card he can carry anywhere (he’ll never use cash by the time he leaves home, why are we giving him cash?).
That’s when, we decided to massively increase his allowance to $10 / year of age. On his 8th birthday, he started to receive $80 / week. BUT, we also made him start to pay for various things in his life which he thought were free and we were already paying for on his behalf. So, this system doesn’t cost my wife and I anymore out of our monthly budget, it just moves the money into his account and makes him responsible for paying for these things now instead of us.
We went through a simple exercise with him, we talked through all the things that he’d have to save for
- Soccer fees
- Piano lessons
- Swimming lessons
- Hot lunches at school
- Friends birthday presents
- Christmas presents
- School year book + t-shirt
- Long-term Savings:
- 10% of his income to long-term savings
- 5% of his income to charity
- Personal Wants:
- Going out with friends (Movies, ice cream, etc)
- Field trips with school
- Summer vacation money
You can download the spreadsheet that we plan out together every year on his birthday (note that he just turned 9, so how he received $90 / week and the spreadsheet reflects that). As you can see, every dollar of his income is accounted for. If he saves on his spending, he can put that money elsewhere, but it can’t just be left hanging, he has to think about where it goes and assign it.
So far this system has worked out really well. It’s created a fun exercise for us to go through (he loves math and is enamored by spreadsheets), he asks about his money frequently and he stays within his budget. He’s become very thoughtful when it comes to gifts for his friends and family as well.
I’m really encouraged about how excited he is. Not only do we get to spend more time together and build our relationship, but he’s learning a skill that will help him throughout his life.
My wife and I want three things for our kids, for them to be thoughtful, kind to others and to become critical thinkers. With this plan, my son’s getting there, and learning more everyday.