Kids & Money: Setting an Allowance
A recent post over at AllThingsFinancial prompted me to reassess the way we handle our kids' allowances. Thus far, we've been pretty lax/inconsistent about allowances, and our oldest son has recently been agitating for a more reliable stream of income. After mulling it over, we've settled on a new system.
We've decided that, once our kids hit five, they'll receive $0.50 per year of age per week, broken down as follows:
30% spending money
30% short term savings (e.g., a video game, pricey toy, etc.)
30% long term savings (e.g., a car, college, retirement, or some such)
10% to the charity of their choice
So our seven year old pulls down $3.50/week, with $0.35 going to charity and $1.05 going to each of the other categories. Of course, he's free to 'upgrade' money from spending to short term savings, short term to long term, or any of the above to charity. We've set up containers for each category, and will periodically sweep their long term savings into an online bank account such that they can login every once in awhile and look at their money. As their savings continue to grow, we'll be investing it on their behalf. We're leaving the destination of the charitable contribution up to the kids. Our seven year is currently thinking of the Salvation Army, whereas our five year old wants to donate to the Red Cross since they helped so much with the tsunami. Once they've save up a few bucks, we'll send it off.
It already looks like this will be a great learning experience for the kids. Our seven year old has gotten interested in how banks work, why/how they pay interest, etc. and our five year old is getting some good math practice as he figures out how to make change on payday. And both are starting to learn how to set financial goals and how to save/budget to meet them. In fact, our seven year old has his sights set on a portable CD player, and I'm sure that he won't spend a cent until he has it -- he's a born saver. Our five year doesn't have a clue what he's saving for, although the release of the Star Wars III has him thinking about some new Star Wars toys.
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"Kids & Money: Setting an Allowance" was first published at fivecentnickel.com
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We have a while to go before we need to worry about an allowance (our daughter is 4 months old), but this has popped in my head a couple of times:
Why not charge interest if the child wants to "borrow" money to see a movie, get a skateboard, whatever? Often when a child wants to "borrow" money from their parents (before they're out of the house) they have no intention of paying it back. I might say "Yes, but you'll pay me back at 12% APY. Minimum payment is 4%, or you can pay it back within 30 days with no interest. Your choice." They'll either think twice about whether they really need the item, or they'll learn a lesson about the cost of credit before they do it with a real CC and ruin their credit rating.
Too harsh?
We just started using online piggy banks at http://www.littlemoneybags.com. It's really high-tech, our kids love it, and it makes allowances a breeze.
