Having money is the best way to understand and learn about money. For kids, the best form of income is done via an allowance.
Unlike traditional allowance structures, we believe that allowance should be a two-way street. Both child and parent should benefit from the system.
What makes our allowance system unique is twofold. First, the kids can have money taken away which reduces their weekly payout. Second, the gross amount earned each week gets divided into categories (investing, savings, charity, and spending).
Establishing the Rules
First and foremost, the allowance tasks and monetary association for each should be co-created by kid and adult. This ensures “buy in” from the kid and establishes the ground rules. Most people are willing to play the game if they know the rules.
For example, if the dishes are loaded and unloaded at each meal, the child receives $2.00 of allowance.
The Catch = Minus Allowance
Here’s the catch with our allowance for kids; they can receive a negative allowance. For tasks that are not completed on time, accurately, or to the best of their ability, they receive a minus for the assigned dollar amount.
If the child does do the dishes, or does them half-heartedly, then the child has $2.00 taken away from their allowance.
In the Pfeiffer household, if the parents ask (or remind) the kid to do the chores, that is also a minus. We realize it’s hardcore, but the results speak for themselves. (I haven’t done dishes in over a year).
Categories: 30% investing, 20% savings, and 10% charity…. Then spend.
The gross amount earned each week is then divided into four categories:
- 30% goes towards investing
- 20% goes into a savings account
- 10% goes to charity
- And the remainder (40%) goes into the kid’s checking account for spending.
We LOVE the Greenlight app. It’s a fantastic app that allows kids to have their own debit cards and accomplishes all the above items.
Greenlight has “buckets” so that each of these categories has the money divided.
For investing, the Greenlight app allows fractional shares of stocks. Our kids own stock in Apple, Netflix, CVS, Lululemon, etc.. In fact, my youngest kid has a stock portfolio that is out performing mine for this year.
Our rule for the savings account is that you can’t touch the money unless something is identified in advance. For example, one of our kiddos wanted a skateboard (and pads). The total was around $80. Money that went into the savings was then used to later purchase that skateboard.
Another advantage of having to identify a purchase in advance is that is staves of impulse purchases. Many items have been identified for purchase but are later abandoned due to a lack of desire.
Greenlight has a ton of charities that you can donate to via the app.
The Remainder / Spending Money
Whatever is left over is spending money for the kids. We go to the movies; they buy concessions with their money. Basically, anything that we (the parents) don’t want to buy, we make the kids buy it.
Side note, if the kid receives money as a gift (like birthday money from a grandparent), we allow that to go straight to spending money. We’re not heartless.
There are multiple benefits to this system. Below are some of the most notable.
Value of a dollar
The first benefit of the allowance system is that kids start learning the value of a dollar. They start thinking differently.
For example: we went to a dolphin show and afterwards visited the gift shop. Our youngest kiddo wanted to buy a $40 stuffed dolphin toy. (It was enormous). Our parental reaction was “heck no”, but we calmly said that it’s okay but that she had to pay with her allowance.
After 30 minutes (no joke, 30 minutes) of walking around the gift shop cuddling the big dolphin, she settled on a $7 small dolphin (that now lives somewhere in the depths of her closet).
The second benefit of having money is that kids get better at math. We make our kids calculate the percentages of each category. Math means more then it benefits you. They also become more aware of costs and expenses.
Character is Revealed
This allowance for kids has had an unexpected result: it’s revealed character. For starters, parents get to see kid’s interest by the types of purchase they make. But more importantly, parents get to see their kid’s values based on their charitable donations.
Every “paycheck”, 10% is taken out for charity. Both of our kids typically donate to an animal foundation (like the WWF). What’s been fun to watch is that they’ll take money from their savings account and add it to their charity buckets without any suggestion from us, the parents. We love that.
Warning: Effort Required
This allowance system takes work from both the kid and the parent. Daily tracking must become a habit.
One can easily fall prey to a kid “mailing it in” and completing the night’s allowance chart with checkmarks. The kids aren’t doing this to be sneaky and take advantage of you. They’re human too. They get in the routine of checking boxes, and unless the parent audits the report, the system will slowly be compromised and die.
What to do for kids with jobs (and other sources of money).
A parent once mentioned that her 17-year-old-son mowed lawns and earned hundreds of dollars a month. She argued that an allowance system won’t work because he’s not incentivized by the amount of allowance offered by the parents.
The solution? While she doesn’t have control over his income potential (which is a good thing), she does have control over the kid’s expenses. The parents owned the car, gas, and mowing equipment. The parents clothed, fed, and housed the kid. All these things can have corresponding costs associated with him.
In this example, the mom can charge the kid a $200 car payment each month and make the kid pay for his own gas. Moreover, she can charge him for his cell phone bill, making him pay for his new clothes, etc..
Regarding the allowance, she can start paying the son $20.00 to do dishes. Yes, this is a significant amount of money; however, she’s receiving the “income” from the son in the form the car payment and potentially offloading some of the real-life expenses to the kid.
We realize that this allowance system is hard to maintain and execute. However, as we tell our kids, the hard and difficult decisions in life are typically the right decisions to make.
Too many people struggle with money. In my experience as a financial professional, it’s due to ignorance and a lack of understanding.
Start learning money at a young age and your future self will thank you.
We would love your feedback and suggestions. Please let us know if you tried this system and if you have any questions or improvements.