My kids started receiving an allowance this past summer. It was time to give our 5 year old some meaningful opportunities with money.
At first, understanding how we should allocate funds was a dilemma. I knew I did not want money to be a reward for chores. Not at this stage of the game.
Household chores help kids to develop a work ethic. An allowance helps kids develop money management skills. These are two critical yet separate lessons that should not be muddied by one another. Money and chores should not be interdependent at this stage.
And frankly, I do not like the idea of paying my kids to do the very tasks that I do not get paid to do (taking out the garbage, making beds, folding laundry, dishes, etc).
Our kids get money each week simply because they are a part of the family. They also need to help around the house simply because they are a part of the family.
Giving our kids money has helped achieve many goals:
- Establish priorities for how to spend money.
- Introduce the abstract idea of a necessity versus a desire (or need vs. want).
- Introduce our practice to save 10%, give 10%, and spend 80%.
- Discuss the less tangible concepts of giving and saving.
- Consider how we will give the money (donations, hand-outs to homeless people, gifts for less fortunate kids, etc).
- Check out the seven points from Teaching Kids About Money.
Money management is learned through trial and error. Simply handing out money is not enough. Money without restrictions leaves kids with a sense that there is cash to burn. This notion of disposable income is hard to outgrow. Kids need to be taught about money.
Without this, the odds are that they will be living paycheck to paycheck (i.e., in your house) long into their adult lives.
Since some will be curious – our 5 year old receives $2 and our 2 year old receives $1. We give them money at our weekly family meetings
The following are good guidelines for helping your kids manage their money effectively.
- Start Saving Early. One of the tools we have used is starting a savings account for the kids' college years when they were about 9 or 10. Even at $10 every two weeks, the savings added up to a noticeable balance by the time they were older teens.
- Set Spending and Savings Patterns Early. Our rule at home is that 10% of each child's earnings is used for charitable contributions–a way to give back to the community or church. An additional 40% goes into a savings account that Mom or Dad have to sign for to withdraw funds. This we call the "college fund" and is reserved for getting the child into college or some appropriate post secondary activity. The remaining 50% can be used at the child's discretion, but we also set up an additional savings account for them to use for this play money. By setting some patterns while they are under your roof, kids can learn good spending and budgeting habits.
- Consider a Matching Savings Fund. Some parents I have talked with encourage savings by matching dollar for dollar what their children put into a college fund. This pattern allows them to see first hand their parents' attitudes about money management.
- Family Financial Councils. About once a year, we take one of our weekly family council meetings to discuss family finances. We take Mom and Dad's gross monthly income and convert it to Monopoly money and then go through the family budget with the children. This helps them see how Mom and Dad budget and how much things cost in the real world. Utility and transportation costs are usually the most shocking for them, and it helps them see the trade-offs that are inherent in any budgeting process.
- Checking Accounts. Helping an older teen establish a checking account can be the next step in teaching financial responsibility. Most banks and credit unions offer special plans for teens. Also, sit down with your teen at the computer and visit the Checkbook Basics site at aboutchecking.com. This site offers online lessons in writing and recording checks, reviewing statements and balancing your account.
Even with good training, teenagers can sometimes have real difficulty with the onslaught of credit offers they receive, usually in the senior year in high school and early college. Times have changed since we fathers were teens. A credit card was seen as a mark that you had "made it"--that you were credit-worthy. Today, teens get offers in the mail for cards with credit limits that make us cringe. What are some guidelines for helping your teens treat credit with the respect it deserves?
- Helping them understand credit will help them respect it. Understanding how credit cards work is a big help to teens. They certainly won't get the true story by reading the ads and solicitations they or their friends receive. Some really good tools for fathers who want to help teach their children about credit include:
* Credit Card Payoff Calculator. This site shows you at various interest rates how long it will take to payoff a given balance if you only make minimum payments. This is an incredibly easy resource and the truth can be astounding!
- Start them out slow. With continuing concerns about teens in credit trouble, it makes some sense to teach them the value of good spending habits with plastic. There are several opportunities to do this with some innovative products. Visa offers a card they call Visa Buxx which is a prepaid Visa card. A parent or teen loads the card with value via electronic funds transfer and then teen then uses the card until the limit is reached. VisaBuxx provides online web access to spending records and allows funds to be added to the card at the parents' initiative.
- Think about intervention. One of the best ideas I have seen is a credit card sleeve that is marketed by the Institute of Consumer Financial Responsibility. These sleeves have messages on them like "Warning: Overuse is Dangerous" and "If You Can Eat It, Drink It, or Wear It, It is NOT an Emergency." Visit the ICEF site for information on these sleeves.
- Don't Bail Them Out. If, despite all your best efforts, your teen gets overextended on credit, take a firm hand. Let them experience the consequences of bad financial decisions. You can accompany them to visit the Consumer Credit Counseling Service in your area and help them find a way to get out of debt on their own. It's better to help them take responsibility for a $2,500 debt than a $25,000 debt later on!
Teach Teens to Budget Money
Teenagers need to see how money works in the real world, including where it comes from and where it all seems to go.
- Explain to your teen how checks and credit cards work, and how banks operate. Be sure to mention interest payments and service charges.
- Give your teen a weekly or monthly allowance, unless she has a job and considers herself financially independent.
- Agree on what you will pay for and what the teen will pay for. Consider car insurance, gas, school clothing, fees for extracurricular activities, the phone bill, and so forth.
- Give your teen financial responsibilities that you have both agreed on.
- Teach your teenager how to make a budget. Make a list of the teen's monthly expenses and the dates they must be paid. Sit down with the teen and explain how her income or allowance must be managed to meet the expenses.
- Have your teen open a bank account. Most teenagers are impulsive, so not having cash in hand may keep the spending down.
- Set goals. Talk about saving for college, cars, entertainment systems, mountain bikes or other big purchases. Make clear what you plan to pay for and what you expect of the teen.
Teaching Money Management
Budgeting is second nature to some of us, and very difficult for the rest of us. It is important to teach your teen how to conserve money, along with teaching them how to spend their money properly. The problem with this is, they need to get money in the first place. That is one of our many roles as their parents, we get to turn into their first employers. Remember, I feel part of an allowance should be based on responsibilities, ie chores.
Teens need to learn how to crawl before they learn how to walk. A steady climb in how much money they receive and what they are responsible to purchase and/or save with that money is my suggestion. Slowly going from having no responsibility with their money to having full responsibility for their personal purchases is the easiest for them to understand, and the least frustrating way to teach a teen money management.
Starting around the age of 12 years old, for about a year, give them 'blow money', ie 1 to 5 dollars a week to spend on anything their heart desires. Do not require that they purchase something or save any of it. Still pay for their activities with friends or things they like to have that you would normally do. The reason for this time is to enable your preteen to know what
it feels like to have their 'own money'. Of course, you don't want it to be a lot of money at this point. By skipping this step or adding it on to the next step, you are causing more frustration than neccessary, for both you and your teen.
One more note on the 'blow money'. This is the money you take away if responsibilities, ie chores, are not met. When you add $5 to the pot for activities or whatever(explained in next paragraph), do not take that away as a punishment, instead take the activity and make them save it. This way you will keep teaching them their money management, and still be disaplining them. There comes a span in every teen's life when it seems like your always grounding them. This can hinder teaching them the responsibility of having money if the punishment of not having any money goes on too long.
From the ages of 13 to 14, you can add to money amount, and to the responsibility. Some suggestions:
- If your child gets $1 for lunch everyday, add $5 to their allowance and have them take the responsibility of buying their lunch.
- If you pay for them to go roller skating, movies, any activity, take an average of what you pay, give them that in their allowance and let them be responsible for their own activites with friends.
- If you add to the amount of 'blow money', make them save half. Have them save it for a certain date though, ex. for Christmas Shopping.
From the ages of 15 to 16, have them budget their own clothing. Hand them a piece of paper with $1000, (you pick the amount), at the top. When shopping time comes around, or they need a pair of socks, they can subtract it from their budget. Actually have them take the receipt and subtract the amount, plus any tax. If you give them money to shop for themselves, subtract the amount you gave them, unless they bring back the change. This will teach them why $150 sneakers aren't worth their price tag.
The only problem I have had with this amount is, and it happens with boys, growth spurts. Girls are generally developed at this point, though they may go up a size in a year. Boys, on the other hand, go from being a size 8 shoe and 5'4" tall to being a size 11 shoe and 6'1" tall in two months. This is going to mess up their clothing budget.
For the ages of 17 and 18, try giving a monthly allowance. If they do not have a bank account, they should get one, with a mac card. This is one of the times in which you will need to trust them. Be the co owner of the bank account, so you can always check the balance if you feel there is a need. The mac card is important, it will save you from handing them money because the bank is closed. Instead of giving them a piece of paper with the clothing budget money on it--pay them in monthly installments. Make them responsible for saving that money for when they will need it, like for school shopping.
What if they blow it?
Natural consequences....they wear last year's coat. It will be a much easier lesson to learn then if they have to learn it when they are on their own.
What if I don't like what they purchase?
You don't like it or it's offensive? We are not going to like what our children are wearing 100% of the time, probably not even 50% of the time. But if it is offensive to you, make them take it back. Give them a choice, take it back and get your money back for something else or throw it out. In other words, it's brick wall time. Just because you have allowed them to make purchases for themselves, does not give them cart blanche to offend you.
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