In the previous blog on 7/2/21, Being Smart with Your Money and Those of Others (https://realpamelaferguson.wixsite.com/website/post/being-smart-with-your-money-and-those-of-others), we discussed the importance of modeling good financial habits for your friends and family and specifically for your children. We also discussed allowances and deciding if you want to tie them to chores or not. Today, we’re continuing with the allowance theme to be more specific as to how to calculate them if you want to use them to help your children understand the concept of money.
When deciding on the amount of allowance, there is no hard and fast rule, which can be good and bad. As a parent, don’t feel that you have to give your children what their friend is receiving. Let’s delve into some of my different ideas. You can choose these or find something different that works for you.
Allowance Calculation Ideas
1. Choose a random amount that works for your family.
2. Give $.50 for each year of child’s age
· Child is 6 years old, allowance is $3/week
3. Give $1.00 for each year of child’s age
· Child is 7 years old, allowance is $7/week
Random Amount
Determine what items your children need to pay for. For example, are you making them pay for extra snacks, clothing, special toys, candy? I would recommend starting by teaching them about segmenting their allowance into three categories, spending money, saving, and charity. So, for example, consider doing a split of 10% to charity, 50% to savings, and 40% to spend. If the total monthly allowance is $50, this would be $5 for charity, $25 to savings, and $20 to spend. That will help you determine what is really needed based on your family and what you expect them to buy themselves.
Age Based
Since I am a self-professed cheapskate and we are a frugal family, we decided to do $.50 for each year of the child’s age. When we began, our oldest children were 5 and 6 so we started the 5-year-old at $2.50/week and the 6-year-old at $3/week. Tying the allowance to their age also sets in automatic pay increases, or “raises,” every year. If you don’t want built-in automatic increases, you can have your child ask for allowances like they would ask for a raise at a job. I have a friend who had to do this growing up and she is great at it now. A learning skill that will serve them for the rest of their life. However, take the age of the child into consideration before determining this.
Just like my recommendation in choosing a random amount for allowance above, I still recommend working percentages to teach your child how to handle money. The percentages can be decided by you and based on what you feel is reasonable. The following is how we personally decided to set up the allowance situation for our children.
· Fifty percent (50%) of the allowance to go into savings. My recommendation is to set aside money for an “emergency” fund (for our teen children, it’s now $2,000). When that amount is met, consider putting any remaining money into a 529 plan or college savings. This teaches them delayed gratification as well as giving them skin in the game for their future education. *You may also choose to put aside for the purchase of a car or other large purchase.
· Twenty-five percent (25%) to go to a charity of the child’s choice. It’s good to let the child choose where this goes. It’s never too early for them to look at organizations where they may find a passion.
· Twenty-five percent (25%) of the allowance would be their “mad money” to be spent any way that they would choose.
The percentages are not the important goal; it is to decide what spending/saving habits you want to impart to your child and what you want them to consider important when they are an adult. I wanted to be sure that my children thought giving to others and saving money was VERY important. I figured that if that’s how they learned to use money, then they would continue when they were actually working on their own because that’s how you learned it.
Let’s look at an example from the allowance of my then 5-year old. Her allowance was $2.50/week or $10/month. ($.50 x 5 = $2.50. Of the $2, $1.25 goes straight to savings, $.63 goes to charity, and $.62 goes to items of her choosing. I know that this may not seem like a lot, but being able to buy skittles in the grocery store whenever you want is quite freeing for a 5-year old.
Let’s look at the breakdown in a little more detail.
1. 50% to savings
· We put major emphasis on this to help them understand how important savings is to an individual and especially a family. The key to this section for our family is that after funding an emergency fund, it is something long term. Depending on the child, this could be a higher priced toy, a bike, a gaming system, or even a car. This helps them understand delayed gratification.
2. 25% to charity
· Our family puts a high importance of giving back so this amount is key to teach them the importance of giving to others. They have the option to choose the charity of their choice so my girls have chosen such things as the church offertory, animal rescue home, and pennies for peace benefiting children in Ethiopia. They have complete freedom to choose a cause of their choice within which they are interested.
3. 25% to spend
· This is equivalent to their take home pay after all expenses, health insurance, and taxes have been removed. In real life, you don’t get to take home your full amount of your pay. Unfortunately, you only get to keep a partial amount. True, it is definitely more than 25%, but children likely only need to pay for luxury items and no necessities, so I have determined that this was plenty.
In deciding to do an allowance, we considered several items before implementing the plan. Some of my concerns were where they should keep the money and should there be any parental monitoring on how the money was spent.
Where to Put the Money?
College
When you set money aside to savings, how do you know where to put it? Where is the best place to make interest on it? I personally use a few different venues depending on what the savings goal is. For example, for college savings, the 529 plans are a great way to save. Go to www.savingforcollege.com, choose your state and see what possibilities you have. You can use accounts specifically for college savings, but you also have the option to choose mutual funds or money markets.
Emergency Funds
As for the emergency funds, a high yield savings account is a great choice with immediate access. The following website gives you several options. https://www.bankrate.com/investing/best-investments/#savings Great read overall, but scroll down to “Here are the best investments of 2021:” to see some savings alternatives. I have had a high yield savings account with American Express for many years. Any extra money is moved out of my checking account immediately where it basically makes 0% interest anyway. Explore www.americanexpress.com and click on high yield savings to open an account.
Long Term Savings
In addition, if you want to have longer term types of savings, I would recommend that you find options that have higher rates of return since the interest rates are so abysmal. My personal recommendation is to put it in a higher yield avenue such as Capital Group www.capitalgroup.com. It has been averaging over 10% return for the last few years. I still have access to the money as well, but it may take a few days to get the money. Since you are charged a percentage when you deposit (not upon removal), plan to keep it there at least a year before taking it out. This would be best for longer term savings.
*I am not receiving any sort of kickback for these referrals.
Retirement
I know that we’re talking about allowances, but I would be remiss if I didn’t put a little bug in your ear when your children are old enough to work. They may be able to begin working as young as age 14 in some states. If they are working, they are able to start putting money aside for retirement. I know it seems crazy, but starting young can give them a huge jumpstart on their future financial health and situation. My teen children began when they got their first job and were able to contribute until they went away to college, then took a break until they could afford it again. The great thing is that the money will continue to grow. Having them put $50-$100/month when they’re working will be a game changer for their future. Once they can work again, make sure retirement is of utmost importance because the best thing for their retirement future is TIME.
Who Controls the Spending?
So, you’ve decided to partition out their allowance, but who decides how the child can use their own spending money? As a parent, do you want to take control of this? Do you let your child have full control? What do you think?
Your goal with an allowance is to teach your children how to handle money. As a parent, you can decide to make all of the decisions for them. I would not recommend this. For my family, my personal recommendation would be to let them spend the money as they please. Ok, time to let go of the reigns a little here. Don’t attack me yet. We typically have a conversation about the expenses (excessive amounts of stuffed animals, etc.) and I give my thoughts on the purchase. I will flat out tell them if I think that it’s a waste of money and they’ll never use it. However, after I’ve given my input, I let them make the decision. Yes, completely on their own. My hope is that it’s ok for them to make some mistakes at this point because having an allowance is a learning experience and I believe they need the space to learn. And that means, making some bad decisions every now and then. Sometimes people only learn when they make the mistakes themselves.
Chores Without Compensation
In my home and in my opinion, working children living at home still need to do chores. The biggest difference at this point is that they no longer receive an allowance. This reinforces the concept of having personal responsibility for their own things and the common family areas. Everyone should do this whether they’re getting paid or not. It’s just part of being a member of the family and someone who lives in the home. Since my goal of an allowance is to help them learn how to handle money, there is no need for additional money since they’re already getting a salary.
The bottom line about allowance amount is to find a value that works for you and your family and one that will accomplish teaching them responsibility, delayed gratification, and how to balance (and split) money. These lessons will lead them to be smart about their money as they grow and make personal decisions on their own with their own money.
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