by Ron Lieber
We should certainly do our part at home by making them do all kinds of chores. But they ought to do them for the same reason we do—because the chores need to be done, and not with the expectation of compensation. If they do them poorly, there are plenty of valuable privileges we can take away, aside from withholding money. So allowance ought to stand on its own, not as a wage but as a teaching tool that gets sharper and more potent over a decade or so of annual raises and increasing responsibility. This chapter is the user’s manual for that tool.
Patience: Still a Virtue
An allowance helps kids learn to save and spend money, a skill they don’t get to practice in very many other ways as they grow up. They are at a time in their lives when the stakes are pretty low, so the inevitable mistakes don’t matter so much. Plus, the primary virtue of receiving an allowance is learning patience.
Figuring out how to delay gratification is a key part of handling money well, but the world now conspires against waiting in a way that it didn’t when we were children. Movies are available on demand rather than on the waiting list from Blockbuster. Television shows need not have commercial breaks. Nobody has to sit by the radio until the song of the summer finally comes on. Information is at everyone’s fingertips, so there’s no more need to go to the library to figure out why the sky is blue or what sea otters look like when they swim. Homes have more bathrooms and telephones, which means less sharing and no waiting. Most of our kids have no recollection of having to wait to see what the photographs they just took are going to look like.
But collecting a big enough pile of money to do or buy fun things still requires some waiting when you’re a child who is too young to have a credit card. And the patience this requires is associated with many good financial outcomes for adults. It’s the rare study that tracks the same group of children well into adulthood, but a 2011 one out of New Zealand followed 1,000 people from birth to the age of 32. By that age, it was clear that those who had poor self-control as children were less likely to save money, have a retirement account, or own homes or stocks as adults than those who had more self-control. The low-self-control group also had more credit problems. Lack of self-control was even more predictive of money problems than their social class as kids or their IQ.
Teaching our children the ability to wait is a big part of our overall goal, and what’s most important about an allowance is what will happen when they’re too old to get it. We parents are in the adult-making business after all, and we should do everything possible not to squander the opportunity to build grown-up humans with 15 or 20 years of experience handling money. With enough practice, our kids can develop the kind of restraint that will keep them out of trouble while still allowing them to spend plenty on the things that give them the most joy.
Allowance: When, How Much, Where, How
So when do we start? By first grade at the latest, though there is no harm in starting sooner. If a child can count and is asking questions about where money comes from and what things cost, then it’s time to begin. Kids who have gotten wise to the power of pestering parents to buy things are ready as well. Even if children seem oblivious to money, there is subtle power in having them watch their small piles of allowance money grow bigger over time.
The next task is to figure out how much money a child should receive each week. With children under 10, 50 cents to $1 a week per year of age is a good place to start, with a raise each year on their birthdays. We want them to watch the money grow and strive for a goal, so they should have just enough to buy some of what they want but not so much that they don’t have to make plenty of tough choices. Starting low allows for more frequent or bigger raises if the initial amount doesn’t seem right (and avoids a reduction, which can feel like punishment). Older kids will probably need more money, depending on whether they’re paying for meals or gas or clothing, all of which I’ll talk about in more detail later.
Once you have an amount, you’ll need a system for tracking and storing the money. In my family, we divide the allowance into three clear plastic containers: one each for spending, giving, and saving. This is, in effect, a first budget. Splitting the money introduces them to the idea that some money is for spending soon, some we give to people who may need it more than we do, and some is to keep for when we need or want something later.
The Spend container holds money for occasional impulse purchases. If our daughter gets the urge for something small when we’re out and about, we front her the money until we can get home and take it out of the Spend container. We don’t have many rules for this money and consider it a kind of mad science experiment. It’s fascinating to see what moves kids to want to buy something once the money is actually their own. They often want random junk, but this is part of the process of letting them practice. After all, how can we teach them to control their impulses until we observe them under real-world conditions with actual green cash?
Kids who are new at handling money will frequently engage in all sorts of ingenious antics with whatever money you give them access to. Take a boy I know whose mother asked me to keep his name private lest he be embarrassed when he’s older. He had received two $20 bills for his birthday and he insisted on carrying them around in a crumpled lump in his pocket every day despite his parents’ protestations. They decided it would be a teaching moment if he lost the money, but he didn’t (though it did go through the wash a few times). He was waiting for the right moment to use the cash, and it arrived one day at lunch when he decided to buy his way to the front of a long cafeteria line with one of his bills. Rather than wait, he handed a $20 bill over to a child at the front and cut in. Once he’d eaten, he used the other bill on the playground to buy a ball from a friend who had been reluctant to share it.
A teacher eventually got wise to the $20 bills floating around and made the two kids give back the boy’s money. Which is really too bad, as it would have been interesting to know whether he felt days later that this was money well spent and how the parents of the newly flush children felt about the emerging underground economy at their school.
The second is the Give container. One way to introduce the idea with younger children is to talk about sharing. In the same way we share our toys with our friends, we also share some of our money with people who need it, except with money we don’t expect to get it back. Talk about times they may have seen you give, to a person on the street or a collection plate at church. Ask them about the things they love to do, whether it’s going to the park or the zoo or the local children’s museum. Chances are, there’s a way to give money to help those institutions, and most of them will have fund-raising staff who will be particularly excited to accept money directly from a child. This, too, is an avenue for teaching patience. Even the youngest children understand that the more money you put in the Give container, the more you can help. Waiting until the container is full before giving the money away will give them a real sense of accomplishment. Families who do a lot of volunteer work should talk about that, too, since money is not the only way to give.
The last container is the Save jar, and we consider it an imperative, a commandment of sorts. Save! But it’s also a joyful exclamation, the sort of thing you’d shout before beginning a journey to a fun destination. One note: Younger kids can have a fuzzy sense of time, so any savings goal should be relatively short-term at first. By keeping the goals modest, there’s a better chance of meeting them. Make them concrete, too; it can help for children to cut out a photograph or draw a picture of whatever it is they’re saving for and tape the visual onto the container itself.
Keep things easy at first by putting an equal number of dollar bills in each container. Alternatively, divide things up so that you need only singles and no change, say, by distributing $2 each week for both spending and giving and $4 for saving. After a few years, consider allowing the children to decide how to divide the money. At that point, there can be an extra incentive for saving. Financial planner Brent Kessel and his wife pay interest on the m
oney their kids save and that which they set aside for charity. Their interest schedule starts off quite generous—anything under $50 earns 50 percent each month. (Yes, not each year but each month; if only banks worked like that.) All money under $100, however, earns just 25 percent in interest, and the rate continues to fall as the balances rise. Eventually the interest falls to a 1 percent monthly rate on anything above a $2,000 balance. I thought this was a bit odd; why not pay even more as they save more to reward their patience? “I found they over-saved even with this schedule,” Brent explained. “Which is why I dropped the interest amount at higher levels. They would have bankrupted me otherwise!”
Gifford Lehman, a financial planner who lives in Monterey, California, gave his kids a choice. They could pay a 15 percent tax on their allowance, which he would make them physically hand back to him to make it tangible. Or, they could set aside twice as much as the tax (30 percent of the allowance, in that case) and then collect a 100 percent match (turning a 30 percent savings rate into 60 percent). This might seem like a no-brainer, but it isn’t always easy for kids (or adults) to be patient enough to wait around to collect on that 60 percent. The unspoken understanding in the Lehman household was that the matched savings was for goals that were years away. If the matching numbers are big enough, many kids will get in the habit, as Lehman’s kids (now grown) did. And it’s a useful habit, since employers often reward retirement savings in the same way in 401(k) and similar plans by matching some of the workers’ contributions.
Whatever rules you set for spending, giving, and saving, starting a weekly allowance is a commitment, so it will help to get a few things squared away ahead of time. First, there are the containers themselves. I hate piggy banks, and the problem begins with the metaphor itself. Pigs are dirty, and they eat a lot, so piggish behavior isn’t something to aspire to. And the idea that you’re somehow a hog if you save money isn’t accurate. Meanwhile, ceramic or metal containers are problematic, since we want kids to be able to see what’s inside and watch it grow. Also, it should be easy to put bills in and take them out. Tiny slots or complicated openings that require folding bills into little squares don’t work well. After trying a couple of different solutions in our family, we finally defaulted to the clear plastic bins that Rubbermaid and others sell as containers for cereal or rice, and our daughter decorated them.
Next, the money to put in the containers needs to be available on the chosen day each week. We did two things to make sure we had enough of the right bills on the right days. First, I started hoarding $1 bills, depositing them in a bowl in our apartment every few days. Then we joined the credit union at our office specifically so we can drop in any time and exchange a few $20 bills for a stack of singles. We also set a calendar alert for each Saturday morning so we would remember to distribute the money, though our daughter now remembers herself most of the time.
In some families, children may have savings accounts that family members have seeded, but they come with strict instructions that the kids aren’t to touch the money for a good long while. Kyle Jones and his sister, Stephanie, grew up in Baton Rouge, Louisiana. His maternal grandmother worked as a housekeeper and earned $1 a day when she first started out. “If you think about that movie The Help, well, she was the help,” Kyle said. Her husband died young, but she still managed to help Kyle’s mother through college and graduate school.
Though her wages remained low throughout her life, she was careful with her Social Security check, and she had a bit of savings when she died. Kyle was 11 years old, and once the family paid the bills for the burial, there was about $10,000 left. Kyle’s mother, Mary Louise, already had strict instructions about what was supposed to happen to it. “My mother had told me to take whatever was left and save it for Kyle and Stephanie,” she said. “She didn’t care about me.”
So Mary Louise put the money away, and Kyle and Stephanie were only vaguely aware of it. They knew better than to ask for any of it either, even for college, for which they both took out loans. In this family, the money has a specific purpose. “The idea of creating generational wealth is something new in the black community, because there isn’t a lot of old money per se,” said Kyle, now a grown man living in Harrisburg, Pennsylvania, and working in finance. “I don’t even think of that money as real. I get the tax form each year, but it’s not for my everyday life. I need it for my next life. It’s almost as if my mother has shamed me for it. It doesn’t exist!”
Using the Bank (or Not)
After a few years of distributing allowance money and granting occasional raises, the sums in the Save container will start to get larger. Parents who remember their first real savings account at a bank may want to open one for their kids. But for children between 8 and 13, it may be best to wait. If we make them put their allowance money in a bank, where the balance is abstract and not visceral like a container full of cash, that account may begin to seem like a black hole for birthday checks, as David Owen put it in his book First National Bank of Dad. Savings shouldn’t feel like punishment, especially when the interest rarely amounts to what it did back in the 1970s and 1980s. One alternative is to cash those birthday checks ourselves and drop them in the Save container, which ought to be kept someplace safe though easily accessible. Teenagers can make their own decisions about when to open a real savings account, say, when they want to start putting money out of easy reach to save for a car or college tuition.
Still, once kids have moved on to higher math, keeping their Spend money in a container no longer teaches them much about counting. At that point, going virtual may make sense. Sites and apps like Allowance Manager and FamZoo help parents assign and track both chores and allowance, whether kids have to do one to get the other or not. When kids want to use the money that the app is tracking, they can spend it online with parental supervision or receive the money on a debit card that parents load via their checking accounts.
Another option is to push money from our own checking accounts to a child’s checking account at the same bank each week. Just make sure there aren’t any fees for the small balances the kids will likely have, and turn off any overdraft coverage that would allow them to spend more than there actually is in the account. Credit unions and community banks often have lower fees than the branches of big national banks, and online banks like Capital One 360 and Ally offer free accounts with no minimum balance requirements. Some banks will let you electronically transfer money to accounts at other institutions on a regular basis without charge. Ask about this before opening a checking account for your child at a bank that is not your own.
As for credit cards, there’s little need for a teenager to carry one unless it’s strictly for emergencies. Why introduce them to the idea of spending money on a card that allows them not to pay the full bill each month and pay interest instead? Debit cards exist for a reason—to help people stick to a budget. New handlers of money need that help more than anyone, so kids shouldn’t get in the habit of buying on credit too early, even if it is our cards that they’re using. If parental convenience is the goal, we can give them cash to buy things they need or transfer money to their checking accounts so they can use their own debit cards. Then there won’t be any way of spending more money than they have.
Wants and Needs (and Carnivorous Plants)
Wherever a child’s money may reside, the urge to spend it will eventually arise. Which begs a basic question: What do we want our kids paying for exactly, and what sort of spending should we ban altogether? The answers to these questions will evolve over time, since we can’t anticipate everything. Still, by as early as age 5, kids are ready to reckon with the framework that ought to govern a lot of their spending for the rest of their lives: wants and needs (and knowing the difference).
With younger children, the definitions can be relatively simple: We need food to eat, clothes to wear, a home to sleep in, doctors and medicine to keep us healthy, and a babysitter or after-school classes if there isn’t a parent at home. Most famili
es consider saving a need too, for the kids’ college tuition and for retirement. A car may also be a need, and many parents treat books and charity or tithing as a necessity too. Then there are things we want, like treats, sports equipment, toys, local excursions, and vacations. These are nice things to have, the explanation can go, but we won’t always get all the things on this list that we want, nor will we get them all at once.
It’s also useful to have kids generate their own list of needs and wants at the outset of the allowance process, just to see what they come up with. Once they understand the concept, be prepared for it to come up at unexpected moments. By the time she was 6, our daughter had already figured out that our car was not truly a need, given that all three of us can use the subway to get to work, school, and most weeknight and weekend events. She explained this while we were giving a ride to a friend of hers whose family did not have a car and wondered why we did. By age 8, she was evaluating charities on the basis of whether they were delivering services that people truly needed, like life-saving medicine, or just things that were nice but not necessary, like public displays of art.
The want versus need test will inevitably come up as our kids get older and start to question the fairness of parental spending decisions. The very best question I’ve ever heard after one of my talks on money and values came from a stumped mother who stood up in front of her peers and reported the following: Her middle school son had asked her why he couldn’t have a high-priced carnivorous plant terrarium, since his parents had bought Hunter boots for his sister. The juxtaposition was a great one, given that many parents are willing to spend as freely as they can afford to on tools for learning, and an interest in plants seems well worth cultivating. After all, kids need to learn; they merely want fashionable, expensive rain boots. I told the inquiring mom to let the kid have some Venus flytraps already.