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Wednesday, July 18, 2012

Allowance For Kids- Good Idea Or Not?

Money smarts. You have it. I have it. But how do we make sure our kids get it when it's not something that we pass down to our children through our genes?
There are many theories about this, and in my opinion, all are somewhat correct, and all are somewhat incorrect. What works for one kid and one family may not work for another, and nothing you do can guarantee that your kids will be money smart, but in my opinion, there are certain things you can do to at least increase the likelihood that your kids will become "the one percent" that is smart with their money, living beneath their means, and having a good attitude towards money in general.
I decided that it's probably due time to make a series on raising "money smart kids" on my blog. Disclaimer: my oldest child will only be 5 years old in September, so I'm not someone with a whole lot experience in this matter as a parent. However, I'm basing this series on things I experienced in my own life as a kid, in books I read, on advice given from people I admire, and just some of my own common sense. This is the first post in the series.

Allowance for kids- is it a good idea or a bad idea? In the frugal world, and in the parenting world in general, I don't think there is any consensus on this issue. Each side has its own valid arguments...

However, one thing I think is fairly obvious. If the first time your kid has anything to do with money is at the age of 18 or older, when they leave the house, they'll be terribly unprepared and ignorant about all the money smarts they need to get by in life, and likely will fall into the "credit card is free money" trap when they are offered a credit card on their college campus. Yes, its possible that given time, they'll learn from their mistakes, but these mistakes often have huge consequences when made as an adult, consequences that can affect the rest of their lives, as well as the lives of their children.
The only way to get good at something is via practicing; the only way to get good at money management is via practicing. Isn't it better, therefore, to practice money management when the consequences aren't so severe, when the consequences won't mean becoming homeless, racking up debt, or not having enough money to put food on the table?
I firmly believe that it is very important for our kids to have money of their own to practice with, to practice saving, to practice smart spending, to practice budgeting, to learn from their mistakes what happens if they give into their impulses and spend recklessly, and in my opinion, having a weekly allowance gives kids the ability to learn all these important lessons.


The biggest critics of giving kids allowance state that you're basically giving your kids free money, money that they didn't have to do anything to earn, other than just being born, which is a bad financial lesson, since in life, you don't get money for free- you have to work for something if you want it. In my opinion, this is a good argument. In this and my next post on this topic, I'll tackle that issue, among others.

My Money Story
But first, I wanted to share how it was in my family growing up, as I think my parents have a pretty good success rate thus far- 2 independent daughters, both of us pretty money smart. My sister, Violet, only a year and a half older than I am (almost 26), is married for 6 years, has 2 kids, she and her husband both have nearly minimum wage salaries, and are both partway through with their first degree, and own their home free and clear.
And then there's me, and you know all about me and my money.
And then there's my single 22 year old brother who is currently enrolled in a post high school education program, and is still supported by my parents, but given a small monthly stipend, which he saves up to use for things that are important to him, and doesn't own a credit card or have any debt. Therefore, I'd say that my parents probably have done something right, if 3 out of 3 of their adult kids are pretty money smart.

Growing up in the Cooper family (not my real maiden name), for some years we didn't have any allowance. What my parents did do was have a system called "Cooper Dollars", which we could earn via going above and beyond the bare minimum of what was expected of us as children. With these "Cooper Dollars", we could purchase things from a "prize box" filled with all sorts of goodies, each with a different price. We could convert these "Cooper Dollars" to money, 10 cents for every "Cooper Dollar", but it wasn't worth doing that, because you could get more of your "money's worth" from the prize box. The only actual money we had to spend or save was occasionally some cash we'd get for the holidays and for our birthdays from relatives and family friends.
When we were a little older, my mother's friend, a wise lady, recommended that my parents start giving us an allowance, for the reasons I mentioned above. My brother got 25 cents, I got 50 cents, and my sister got 75 cents a week.
No, I'm not so old that during "my day", that was worth a lot of money. That 50 cents couldn't buy anything. Nor could my sister's 75 cents, and especially not my little brother's 25 cents.
Oh, I forgot to mention, my parents wanted us to "tithe" from our allowance, and save half of it, so each week, 5 cents would go to charity, 20 cents would go into savings, and I had 25 cents to spend or save, as I saw fit.
Eventually, we complained to our parents that it really wasn't enough money to buy anything, so we got an "upgrade"- I got 75 cents a week, my sister got a dollar, and my brother got 50 cents a week.
That was the basic allowance we got.
We also had certain weekly chores we had to do in addition to our daily chores at home. If we would do those chores on Wednesday, as my parents wanted us to, we'd get an extra 50 cents, if we did them on Thursday, we'd get an extra 25 cents, and if we did them on Friday, we'd get nothing extra.
So even though our allowance was small, we did have ways to increase it. Yes, it was only by a small amount, but when your allowance is only 75 cents a week, another 50 cents a week is significant. And my parents were teaching us that if you want something extra, you need to work for it, its not just a "given".

That small allowance and our chore allowance were one way we had money, but my mom also would randomly assign tasks around the house and yard, and whoever would do those jobs would get a significantly larger sum than our allowance, at least a few dollars, such as mowing the lawn, shoveling the sidewalk, weeding the garden, etc. If my mother wanted to go out and would have hired a babysitter, she'd "hire" myself and/or my sister to watch over my littler brother and sister. (They're 9 and 11 years younger than I am.)
On top of that, we also had money making opportunities outside the house. From a certain age (I don't remember which), I would babysit friends and neighbors. It started off that I got paid 2 dollars an hour (I was quite young then), and then it increased to making 7 dollars an hour for babysitting for a regular job.
In the summers, I also worked part time in my father's medical office as his secretary, making minimum wage. My sister also babysat and did other odd jobs for cash.
With this money, we spent part of it on things we wanted, and part we saved. My sister and I ended up with a decent savings account as teenagers, which my father then put in a brokerage account and then invested in the stock market.

That was how we got/earned money as kids and teenagers, and I feel it has a big impact on our attitude towards money today. Of course, modeling smart spending was another thing my parents did, but that'll be for another post.

For now, though... this is just about allowance.

In Practicality...
You can decide if you want to give an allowance to your kids that they'd get no matter what, or to pay them for certain jobs available, or to just encourage your kids to earn money from out of the house.
I recommend doing a mixture of all three, giving allowance, paying for jobs at home, and encouraging them to take jobs outside the home.
The most important thing, in my opinion, when trying to teach your kids to be money savvy, is encouraging them to save money. I suggest opening a bank account for your child as a way to do this. In most places, you, as a parent can go together with your child to the bank and open your child a savings account that is linked with your current account. (This allows you to see what is going on, but still giving your kids autonomy.) By doing this, your child has an ability to store his money in a way that:
a) encourages saving money because it compiles interest
b) the money can't get lost or stolen
c) is a little harder to remove from than just a piggy bank, so it discourages impulse buying as you actually have to plan a trip to the bank to take the money out of savings instead of just using it.

The one thing I really have a problem with, and think causes problems in the long run, as it doesn't help your kids learn how to manage money in the least, is to not give your kids any money of their own or allow/encourage them to earn money on the side.
If every time your kid wants something, he just asks you for the money to pay for it, he doesn't learn to save up money for things he wants, doesn't learn the concept of delayed gratification, doesn't learn the concept that you can't always have everything you want, that you have to choose what is important to you and spend the money on that. As a parent, you may be choosing and deciding these things for your kids (or you may just give them money whenever they ask, but I doubt you would, as I assume most people reading my blog don't have enough money to even do that if they want to), but if you don't let your kids have their own money to make their own decisions with, you're not teaching them to be responsible with their money, even if you are.
I know some people that even when their child wants to have a job to earn money, their parents don't let, because they "need them at home", or think they should be spending time on schoolwork and not on money making, and that is reasonable, in my opinion, so long as they do have some method of getting their own money, so they can learn how to use it.

Next post in this series-
If you do give an allowance, what is the best way to do so?

As a kid, did you get allowance, or have ways of earning money, or did your parents just give you (or not give you) money when you wanted to buy things? Do you think this taught you to be responsible with money? Why or why not? Do you do the same thing for your kids vis a vis money as your parents did? Why or why not?
Do you think kids should get allowance? Do your kids have money of their own?

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