Why You Should Hand Your Kids a Huge Allowance
How much is the right amount for your child's allowance?
As the father of 20-year-old twins, I not only strongly believe in an allowance, but also that bigger equals better. However, just throwing money at your child isn't a good idea. Money alone could easily destroy your child's ability to understand financial systems. When tied to a system of lessons about money management, large allowances can be a powerful tool.
Some people are surprised by my view on allowances. As a financially conservative money-based podcast host, you'd think I'd have a different perspective. But done right, an allowance that's fairly large and frequent could be the right answer.
Why? Because simply put, you'd rather that your children made mistakes with a few dollars early than to be left alone to figure out how to handle cash when they leave home.
[See: 9 Scary Things Consumers Do With Their Money.]
Here's what you're trying to avoid: In our family, we never talked about money. Ever. When I'd try to listen in on my parents' money discussions, my dad would tell me that it was none of my business, and I was reminded that polite families don't talk about money. Children especially don't participate in these discussions. I'm sure I'm not the only child who never received a f inancial education. When I was a financial advisor, many of my clients shared similar stories.
Fast forward to my college years (and a military college at that), and for the first time ever, the kind people at American Express offered me my very own credit card. I signed up immediately, because I think it came with a free blanket. Then I proceeded to spend tons of money on it that I couldn't afford on things I didn't need.
My credit was ruined. It took me several years to undo the damage I'd done with my first real financial decision.
[See: 12 Simple Ways to Raise Your Credit Score.]
In my own parenting life, I decided to treat my children differently. We gave our kids an allowance equal to their age. I can hear the question brewing already, "What does an 8-year-old need with eight dollars a WEEK?" The answer? Nothing. If you want to know the truth, they don't need that money at all, and yes, I agree. It most definitely is a ton of money for a child that age.
However, we didn't just "give" them money. The allowance was only one small part of a bigger plan. I had to parent. My goals were to teach my children a few things:
1) You're a member of the family, and that isn't a part of our allowance system.
2) You're going to have to make purchasing decisions often in life, and some of them will undoubtably be mistakes. We should start the mistake-making process early.
3) Every member of the family should focus on talking through financial strategies together so that when you leave home, you're comfortable talking and asking questions about money.
So, toward that end:
Our children had chores that weren't part of the allowance. These tasks weren't tied to money. You made your bed. You took out the trash. You set the table and vacuumed. That had nothing to do with the allowance.
A friend of mine (and great financial writer), Shannon Ryan at The Heavy Purse, uses a jobs board with her children. Her kids can apply for posted jobs, are interviewed about their strategy and then are compensated when those jobs are completed. That's also a great idea. My kids are older than Shannon's and I'd never heard of that approach, but it would have easily fit into our own.
Our kids were responsible for their own movie tickets, concessions, ice creams and treats, and toys. If you wanted a cool video game, that's fine, but you were going to save for it and buy it. This one was difficult to monitor, and there were too many times when this slipped through the cracks. If I had it to do over again, I would have monitored what we purchased for our children more so that nearly anything that didn't involve food, clothing or shelter came from their own decision-making process.
Some parents have asked me, "What if they're about to buy something they shouldn't?" If it's objectionable, you should step in; but if it's just a waste of money, this is a fantastic opportunity for your child to learn! Sometimes our children would make horrible mistakes with money. My daughter bought a few items that fell apart immediately. My job as a parent was to let her waste the money (I knew the stuff was going to fall apart, but wanted to help her learn her own lesson). Later, though, I took her aside and we had a discussion about quality, and how to make purchases that wouldn't disappoint you. Today, my daughter is in college and is the world's best thrift store clothing shopper. She only buys name-brand clothing and never pays more than a few dollars for items. They're always high-value, low-cost garments. Mission accomplished.
[See: 12 Ways to Be a More Mindful Spender.]
As much as possible, we'd encourage our kids to save their money. Because we wanted to emphasize the value of saving, we'd discuss letting your money work for you. That didn't just mean opening a savings account. My son opened a brokerage account early on and we talked about how to pick a stock to buy. Together we settled on Ford as his first stock. He still holds it, and through the years has added plenty of others. He's 20 and knows more about stocks than many folks in their 30s.
Our children were involved in financial meetings. Before we implemented any of these strategies, I'd come home and all three TV sets in our house would be on, every light in the house would be on and everyone would be in the backyard. I needed to change this. So, Cheryl and I called a "team meeting" and decided to play a game. We'd chart electric usage on a grid each month, trying to see how low we could go.
As you can see, the allowance was only one part of the equation. Parenting and explaining as much about money as possible was every bit as important. Summer is a great time to get started because you have your kid's time and attention. I've never regretted giving my children large allowances, but without financial education, it could have been a disaster. Help your children understand money now so that they don't have to worry later about whether to take the credit card in the student union. Let them learn from my mistake. My children did.
Joe Saul-Sehy is the co-host of the award-winning Stacking Benjamins podcast, which focuses on earning, saving and spending with a plan.
