When I was growing up, I had an allowance with no strings attached. My parents never really explained to me why when I was young. I just enjoyed it. Who wouldn’t? Now that I have a family of my own, I had to figure out what to do for my children’s allowance. I know I managed my money well when I was young and accounting was even a career I thought of … I learned many things that weren’t explained to me that I now understand.
My wife and I discussed a number of points and settled on some behaviors we wanted to re-inforce.
Learn To Spend
One of the mistakes many young adult make when they start making money is that they can often spend more than they should and can lose control of their finances. They essentially don’t know how to spend or control it. Learning to spend is something you need to experience to learn. This is a behavior we want to teach our kids very early. Our strategy for them to learn is to let them spend their money as they wish to experience the consequences early. Obviously, there are limit to what they can buy, it’s not what they want but what they are allowed to. Now that the parameters are established around the buying guidelines, it’s basically their choice to buy a book, a magazine or songs from iTunes for examples. They need to know how much money they have and use it.
The results has been quite positive. We don’t get a constant stream of demands and asks since they know it’s their choice to decide if they want to spend the money on the items or not.
With a regular weekly allowance, the piggy banks weren’t enough. We opened a bank account for them where the allowance is deposited regularly. The automatic deposit was necessary a couple of years ago as they were spending the coins a little loosely… The bank account help them save to think about bigger purchases. At this point, they started tracking how much they have in a notebook and adding it every time they receive their allowance. Our oldest has been tracking her allowance to buy an iPod touch. (A purchase not yet approved … where do you draw the line is a totally different topic)
Learn About Interest
The benefit of the bank accounts for the kids is that it comes with a high interest account that generate interest every month. Since they track their funds, they have been curious about this money from the bank. It made for a good stepping stone to discussing the benefits of saving money and generating interest from it. My oldest has now seen the monthly interest grow in her account and understand the correlation between the amount in the account and the interest earned.
Growing Positive Behaviors
My children are still relatively young, but these behaviors are in place now and we can build upon it. We decided early not to link allowance with chores. Otherwise you can risk going down the path where they ask for money for everything they do. Chores are simply chores that need to get done as a family. You’ll notice that saving isn’t covered either. My intention is to start them with a couple of shares to DRIP to show and experience compound growth. I’ll have another post dedicated just for that as the time comes.
We use to hear them tell us to just use our card to buy items. They have a much better understanding now. They understand that the card is tied to the account and it needs to have enough money.
Readers: What has been your experience with allowance?