This week, The Simple Dollar attempts to address challenging questions in personal finance by looking at both sides of the story and figuring out some of the factors you need to look at to make a decision.

As my son approaches an age where he starts to really understand money (he already is understanding the idea that money can be exchanged for items), the issue of an allowance starts to rear its head. Growing up, I had an allowance sometimes - at other times, I had a system of earning money for tasks, and simply nothing at all at other points. My wife had an automatic allowance, but a very small one.

Naturally, in our desire to raise our children with some sense of financial self-discipline, the issue of an allowance has already come up for serious discussion. The answer, however, is not so clear. Let’s look at both sides of the issue.

Yes!

As soon as possible, children need to feel the risk and reward of completing tasks for earnings. In the real world, people don’t receive money for nothing - they have to work for that money. Children should realize that with effort comes reward, but a lack of effort brings a lack of reward.

Part of the job of parents is to prepare children for the real world, and giving them something for nothing gives them a strong false impression of how the world works. If you supplement this with very strong financial and personal lessons, they may be able to overcome this, but actions speak far louder than words, and they’re learning, by your actions, that they should expect compensation for things they’re going to have to do in everyday life.

A child that is well-rounded will eventually learn that there is a fair market value for some jobs and then they will come to expect some compensation for those tasks - mowing the lawn, for example. However, there is no fair market value for making one’s bed, and to expect to be compensated for it either assumes you’re rich enough to afford a maid (which makes most of this conversation moot) or you’re teaching them some very faulty lessons about life.

No!

In a household, there are certain expectations that everyone should fulfill to keep things moving forward. These responsibilities vary from family to family, but in most families this usually involves a child keeping his room clean, helping with dishes, and perhaps a few other tasks.

These are fundamental tasks that parents do without financial reward, and so should the child. Sometimes tasks need to be done and aren’t met with financial reward - adults don’t receive payment for doing the dishes or making their bed, so it creates false expectaions if a child begins to expect to get paid for such things.

When an allowance is given to a child in exchange for basic chores, it creates a very false reward system. They expect to be rewarded for doing basic household tasks, and that kind of expectation does nothing but persist and grow over time into some beliefs that funds should be expected for basic things that, in adulthood, they simply won’t receive compensation for.

There are some systems where it’s fine to pay a child - extra chores and other accomplishments above and beyond the average. But a basic allowance tied to basic chores teaches things that you really don’t want to teach.

My Take

I’m fine with a basic allowance completely not tied to basic chores. A small allowance of something like $5 to $10 a week seems appropriate to me - it enables the child to figure out some financial lessons for themselves. Meanwhile, they should be expected to complete some tasks, but it’s not tied to their allowance - that expectation should be taught via other carrots and sticks.

Similarly, I’m on board for “bonus” allowance for doing things above and beyond the usual. For example, I have no problem with paying a child to mow the lawn - I’d have to pay someone to do that, too. I’m not real strong on bonuses for great grades - I guess I can tolerate a small amount for an A, but that’s really not something I’m sure about.

I don’t feel that the giving of a basic allowance by itself can teach useful lessons. Tying it directly to tasks teaches things I don’t feel right teaching. However, I think that many valuable lessons can be taught after the allowance is given: budgeting, investing (in a savings account), and so on.

This week, The Simple Dollar attempts to address challenging questions in personal finance by looking at both sides of the story and figuring out some of the factors you need to look at to make a decision.

Yesterday, in response to a discussion about the financial costs of a two year old child, the following comment was left, which resulted in the beginnings of a debate about the value of daycare, the value of both parents being employed, and so on:

It’s unfortunate that you send your kids to daycare. These are the prime growing years for a child. How viable is it to have your wife work at home or not work at all?

When a person becomes a parent and they look at that child for the first time, they want that child to have every great opportunity in the world: a great education, a healthy upbringing with strong values, and so on. Unfortunately, for most families, difficult choices have to be made. Do you send your child to daycare and focus on earning money, or do you stay at home with the child to maximize their personal fulfillment? It’s not an easy question, so let’s look at both sides of it.

Daycare!

Many modern families find themselves in a financial situation where they both must work to provide a good home for their children. This isn’t the 1950s any more - house prices have grown at a rate much higher than inflation, just for starters. As a result, many people are in financial situations where both parents have to work.

Beyond that, a quality daycare center can be a very enriching experience for your child. A good center can provide many activities, social interactions, and experiences that simply can’t be done in a home environment because of expense of the materials and the startup time involved. For example, the daycare center that I take my children to has no televisions anywhere and a schedule of activities for the children each day that, quite honestly, I couldn’t match in a home environment. The primary employees are paid strong wages (they have “assistants” that are paid minimum wage who primarily just set up and take down activities and occasionally assist with wrangling larger groups of children) and they genuinely care for the children. The adult-to-child ratio never exceeds 1 to 4, either. It’s expensive, yes, but the experience is a good one for my children.

I’ll be the first one to say that a daycare where they plop children in front of a television all day is not a good one, but a quality daycare center can enrich your child and enable you to get things done.

Stay At Home!

The argument for a stay-at-home situation is obvious: no matter how good a daycare center is, it doesn’t match the love and nurturing care that a parent can provide for their child. Workers at daycare centers are employees - not parents - and they don’t bring genuine one-on-one attention and love to the child that a parent can bring.

Not only that, the actual financial loss due to having a stay-at-home parent usually aren’t as much as you think. You’re eliminating the cost of daycare, the cost of transportation to work, the cost of clothing for work, the cost of eating out with and entertaining coworkers, and some home costs as well, since a stay-at-home parent can cook meals.

Adding the two together makes a very compelling case for putting your career on pause for a while to give your child the very best.

My Take

I live in a home where both parents work, but we both wish we could be a stay-at-home parent at least part of the time. In fact, with the birth of our second child, we came very close to making that leap, but backed away from it after some analysis.

The real reason is that we feel our children benefit on the whole from their time at daycare, particularly our two year old son. We spend quite a bit of money on daycare for our children (it’s literally the best in our area), and the environment is one that we feel very happy with, as described above. Our son’s language skills are off the charts for children his age (he can largely speak in complete sentences - and always expresses complete ideas - at age two) and he often exhibits learning that we simply didn’t teach him. Plus, we largely devote our evenings and weekends to spending time with him and his sister, so they get a full helping of loving and nurturing care.

My feeling is that if you can afford a daycare that meets or exceeds the standards you would set at home, then daycare is a reasonable option. However, if you’re working a low-wage job where you can only afford a very low-cost daycare, it’s probably beneficial for both you and your child to look at being a stay-at-home parent, particularly if there is additional income at home.

Almost a year ago, I wrote a summary of the day-to-day costs of having a one year old child, and I concluded that it cost us about $40 a day to maintain our son. I thought it would be worthwhile to note how that spending changes over time, so here’s an overview of the costs of a two year old child.

Clothing At this point, clothes last him for about six months or so. He’s currently wearing a mix of 24 month and 2T clothes, which are slightly big on him (he’s on the small side for his age, but not worryingly so - 30th percentile or so). Because of that, clothes costs are actually much less than when he was younger and needed baby clothes replaced every few months. I would estimate that overall, his clothing costs are now down to an average of $1 per day.

Food As he has grown, so has his appetite. He now eats a bigger portion of the food prepared for dinner than he did a year ago, and his beverage consumption has gone way up. He primarily drinks water, with milk and some fruit juice. Altogether, his food and beverage consumption add up to about $2 a day, up substantially from where he was at a year ago.

Child care Our daycare (like many) offer graduated rates, so he now qualifies for a lower rate at daycare. As a result, we now spend only an average of $16 a day on child care for him alone, though he is receiving an additional deduction thanks to his sister attending the same day care.

Hygiene His diaper costs have gone down a bit, as he doesn’t dirty as many as he did at age one, plus he’s on the road to potty training. His laundry costs have also gone down, thanks to our moving to a home that has a washing machine, and his other costs (soap, shampoo, water, toothpaste) have largely stayed the same. Thus, overall, I would estimate his hygiene costs at only $2 per day at this stage, and when he’s fully potty trained, they’ll go down even more.

Entertainment & education He has a set of about ten books that he likes to read over and over again (seriously, we read him almost all of them every single day), and it takes some time to add a new book to the rotation, so we have not been buying him nearly as many books as before. Most of his other toys are gifts from his family or homemade (he likes playing with pots and pans, for example), so his entertainment costs are actually lower than a year ago, once again, at roughly $0.50 a day.

Health care This has held pretty steady, with insurance costs staying the same and his copay staying the same - it’s still an average of about $5 a day.

His future I have doubled my commitment to his 529, so this has increased the money we’re putting away for his future to about $7 a day.

Totaling up all of the costs, a fair estimate of our daily cost for our two year old child is $35 a day, cheaper than the child cost of just a year ago. Meanwhile, our two month old costs substantially more than that, primarily due to higher child care costs and hygiene costs (she goes through diapers at about three times the rate of her big brother). Obviously, we could make many additional choices that could reduce these costs, but breaking it down makes it clear which areas you could reduce for your own child.

After a few years’ worth of these estimates, I plan on plotting the data. My belief is that the valley will be between the ages of three and five, and then start rising again after that.

This week, The Simple Dollar attempts to address challenging questions in personal finance by looking at both sides of the story and figuring out some of the factors you need to look at to make a decision.

For many parents, it’s a given that they’ll save for their child’s college education, and they consider it almost negligent that you wouldn’t help your child with college and perhaps with their life afterward. On the other hand, other parents believe strongly in the philosophy of complete independence after high school, allowing their children to forge their own path with minimal or no support.

Which is right? Let’s look at both sides in a bit more detail.

The Argument For Support

College is a major financial burden for anyone. With incredibly high tuition costs, most students that get a post-secondary education will incur some level of debt - I know that my wife and I have, even after our scholarship support.

A parent’s responsibility is to help their child develop into a functional adult, and part of that responsibility is ensuring that they get a strong education. Sixty years ago, that might have been just getting them into high school, but today’s world is much different and for most students, college is a part of their education cycle.

Furthermore, it’s much more difficult to simply walk out of school and right into a job that you’re going to have your whole life. The average person today has eight jobs before they turn thirty two. That’s not stable, no matter how you cut it, and without a solid and consistent income, it’s incredibly hard to get a foothold.

The idea of cutting off your child at eighteen is completely outdated in the modern world. That philosophy does not reflect today’s challenges and leaves your child hung out to dry in a highly competitive world where no one is going to provide that great job right out of school that the parents of these young people might have had.

The Argument Against Support

In today’s world, independent and intelligent young people are the lifeblood of society. Resourcefulness and leadership skills are what makes a person a success in life, and holding your child’s hand all the way along does not build those skills - in fact, it stunts them.

If you have raised your child with the ability to solve problems and think for him/herself, then the challenge of figuring out how to pay for college (if that’s the choice he or she makes) and how to make a success for him or herself in life is one that your child can tackle on his or her own. The greatest tools you can give a child are the ability to reason and solve problems - and financial support just gives an easy solution to life’s challenges.

Furthermore, planning for that support requires that you take away resources that can help them develop today. Instead of socking money into that 529, you could send your child to an enriching summer camp, provide them spending money while they explore their interests in high school, and perhaps even pay for their tuition at a private school. This will give them the foundation to springboard to their dreams, not holding their hand until they approach thirty.

Giving your child a crutch through the early stages of adulthood does not teach them how to walk without that crutch. If you truly want your child to be able to stand up and walk on his or her own two feet after high school, then the time to invest in the child is well before then. Don’t wait around and invest in a college education - give your child the background and tools to succeed as early as you can.

My Take

I have 529 plans for both my daughter and my son that I fund every month. I fully intend for them to go to college, and I don’t want them to be burdened with the level of student loans that I’ve had to face. While I do feel that facing college without someone paying my tuition (just scholarships and student loans) taught me a lot, I don’t necessarily think that the burden was a good deal, overall.

However, if a great opportunity for their growth came along, I’d gladly stop funding the 529 and instead pay for that opportunity if I couldn’t pay for it out of pocket. I would far rather capitalize on a great opportunity in their high school years than contribute $500 or $1,000 to their college fund.

What’s your take?

My son is starting to reach the stage where he’s strongly attracted to the toy section when we’re shopping. This has already created a few interesting situations, because he’s getting bright enough that the older distraction techniques no longer work. It’s time to start treating him like a child and not like an infant.

We’ve all seen situations where the parent has an out-of-control child, screaming because they didn’t get the latest toy. I also know that I don’t want this for my child - a child so far wrapped up in consumerism and self-gratification that they’ve lost all control over themselves.

So what’s the solution? Lately, my wife and I have been looking carefully at this issue and we’ve found a big pile of tips for how to handle your child’s material wants and desires in a fashion that doesn’t result in a temper tantrum.

Minimize his exposure to advertisements, particularly those targeted to children. For the most part, this means strictly limiting his television viewing. In fact, he basically doesn’t watch television at all, other than some occasional sporting events (and he barely pays attention to those).

Don’t give into screaming temper tantrums at home. If our son throws a temper tantrum, he must learn that screaming won’t get him what he wants. As soon as I start giving him what he wants when he screams, he’ll equate screaming with successful acquisition of what he wants. Thus, sometimes I have to let him throw a temper tantrum at home. Thankfully, this is rare, and he’s learned it doesn’t work, but sometimes he sees other children doing it and tries it anyway, but we don’t give in to it.

Offer him other choices outside of the situation. If he starts seeming like he’s getting wound up about a toy in the store, I remind him of a few of his favorite toys at home and ask him which one we’re going to play with when we get home. Alternately, sometimes I’ll also throw in a trip to the park as a choice, particularly if one is already planned. This usually makes him think about it a bit, and I use that time to move far away from the toy that’s causing the anxiety.

Give him some small allowance and then allow him to use that to choose an item. We semi-regularly give him quarters, particularly when he does something good for the first time on his own. Then, when we go to the store, we’ll count up his change and see if he can get a new Matchbox car (his toy of choice right now). He has learned that four quarters plus a few pennies means a Matchbox car, so he can almost fish out the money and pay for it himself. This gives him a target in the toy section, something to look for. It’s also a great way to encourage counting skills and sorting skills.

Have a very, very low tolerance for public tantrums. If he actually reaches the point of screaming and yelling, we leave - immediately. He then has a “time out” in his car seat while I stand outside cooling my own heels. After that, if we need to, we may go back inside, but it’s strictly to finish shopping, pay for the items, and leave. Public places are not the appropriate location to throw a temper tantrum, and there needs to be negative consequences for such behavior.

So far, these tactics have worked extremely well in concert. He has only had one notable public tantrum in the last few months, and it was a long while ago - the “time out” in the car really did the trick. He also realizes now that the toys in the store are mostly to look at unless you have money to buy them, a key connection, I believe.

In the last week, I’ve received four emails from nearly-panicked people who have recently discovered they’re pregnant, crunched the numbers, and thought “MY GOD WE CAN’T AFFORD THIS CHILD!!!” and fell quickly into panic mode.

Don’t.

There are a lot of reasons why having a child isn’t the financial bomb that it’s made out to be. Trust me - I was in deep financial straits when our first child arrived and we’re now in much better financial shape than we were before.

Here are five big reasons why you shouldn’t panic when the plus sign comes up on the pregnancy test.

Adaptable budgeting Most people can’t believe that they can squeeze water from a rock when it comes to their budget, but you find when you’re responsible for a child, you find ways to make do that you would have never realized before. It simply adapts - it’s hard to explain until you start going through it.

Changes in spending and priorities Do you spend money eating out and going out on the town? That spending is going to drop drastically, as will your other entertainment costs. You’re going to be spending a lot of evenings at home now, and evenings at home are almost always cheaper than evenings out on the town. Your shopping trips will also get more efficient, as you won’t have time to muse slowly through the aisles grabbing consumables - instead, you’ll have a list and try to do it as efficiently as you can. This also saves some serious money - we actually spend less on groceries now with a family of four than we did when it was just the two of us.

Another dependent on the ol’ tax return A child counts as another dependent on your taxes, which means that it’s an automatic $3,200 deduction on your taxes (and likely more in future years). If you’re in the 28% tax bracket, that means your income tax bill just went down by almost $900.

The child tax credit In addition, through 2010, you also get a $1,000 tax credit for each child if you make below $110,000 a year. A credit is not a deduction - it’s literally subtracted from the total amount of tax you owe. This means that between the factor of the child being a dependent and this credit, you’ll likely save almost $2,000 on your income taxes.

Child care tax credit To me, this was icing on the cake. The child and dependent care tax credit states that you can receive up to 35% of the money you pay for child care as a tax credit, up to $3,000 of expenses for the first child (or $6,000 for the second and subsequent children). Thus, let’s say you’re going to be forking over $1,000 a month for child care. That’s $12,000 over a year, but of that $12,000, you’ll be able to claim $3,000 of it as a tax credit, directly reducing your taxes by $840 if you’re in the 28% bracket. Tack that onto the additional savings above, and caring for a child isn’t as expensive as you might have thought.

When you first find out that you’re pregnant, let it be a happy time, and don’t worry too much about the money - it’s not as bad as many doomsayers might lead you to initially think.

This post was written for Blog Action Day, in which a group of bloggers are all posting on environmental topics on the same day.

I’ve written several times in the past about environmental issues and saving money:

The Green Dollar
Conserve Energy, Save Money, Save The World
Prosperity and the Planet
42 Ways Going Green Saves a Ton of Money

If you want specific tips on how to simultaneously save money and also help the environment, all of those articles will point you in the right direction.

In fact, this article started off along those same lines, but the more I thought about it, the more I realized just listing environment saving frugality tips probably wouldn’t make much of a difference. Honestly, repeating the talking points from An Inconvenient Truth won’t make much difference, either - almost all of you have already heard this stuff and have already made up your minds about it.

Instead, I thought I’d tell why I, a person pretty devoted to the idea of free market capitalism and largely opposed to the Environmental Protection Agency, am rather green in my beliefs and actions and what I’m actually doing to make a difference. And, no, it’s far different than just changing a light bulb.

If you read The Simple Dollar for money stuff, just bear with me here, we’ll get around to it.

Why I Care About The Environment

The reason is simple.

My son is almost two, and he loves to run around in our back yard barefoot. We have thick grass that we allow to grow rather high. I go out there barefooted myself quite often to play with him - there’s nothing like the feeling of a few inches of grass under your toes, squishing beneath them, as you run around.

It was an experience that I had in childhood, and also that my father had in his childhood - we’ve talked about it before.

It’s an experience that I want to exist for my own children, and their children, and their children. I want them to have big leafy trees to climb and thick grass under their toes. I want them to be able to breathe in big mouthfuls of fresh air. I want there to be places where you can open windows on opposite sides of the house and have the wind blow through. I want there to be rain clean enough that they can stand in the yard, looking up with their mouths open catching raindrops. I want there to be clean, abundant snow in the north so that children can make snowmen.

This isn’t just for my own children and grandchildren, it’s something I want for every child out there.

What I’m Doing About It

Honestly, I’m not that concerned about the global environment. I’ll gladly support candidates who make what I consider to be sensible choices about large-scale environmental concerns, but for the most part, there’s not much I can do. What I worry more about is the environment that I can control, the local area.

Whenever I can, I try to do things that reduce my footprint. This almost always ties into increasing my gas mileage and reducing my home’s energy use. I also dream about things like a wind turbine at home for the eventual day when we move to a place deep in the country. I usually try to minimize our garbage output, and a big step in that direction is in the form of cooking at home, eating as many leftovers as possible, and utilizing our composting bin for many food wastes. We try to minimize our own possessions if at all possible for the same reason - less stuff, less overall footprint on the environment (this is the best argument of all to battle my wife’s pack-rat tendencies). I also focus strongly on reliability and energy efficiency for appliance purchases - I’d far rather pay a lot more up front to not replace my appliance very often and have it eat only a small amount of energy. Almost all of these things not only help with environmental issues, but they also save money, especially in the long run.

I also follow hobbies that help. For example, we have a boxed garden ready to go for next spring and a compost bin that’s almost finished with a batch of compost to spread on it. Growing our own vegetables serves several purposes - it absorbs CO2 and produces oxygen, it allows us to eat these vegetables and thus reduces the need to transport them, and we also do things organically (hence the compost) so we don’t add unneeded chemicals to the system. This isn’t efficient in terms of time spent versus food produced, but it’s a hobby that is productive that we both enjoy.

In addition, my wife and I both make small moves to keep the local area clean. I often pick up trash when we’re walking with our kids and make sure it finds its way to a trash receptacle. We are very open about sharing with neighbors so that there are fewer unneeded things littering people’s garages and homes.

These are all small things, but they all add up to a better future. The more people committed to little things like this in their lives, the better shape the environment will be in for our children and generations to come.

To me, it’s not a global commitment. It’s a commitment that begins and ends with me. I waste stuff all the time, but how can I minimize that waste so that my grandchildren have fewer mistakes of mine to deal with? It’s a challenge to me and the way I live that’s far more relevant than An Inconvenient Truth.

Over my son’s life, he’s received numerous gifts from his parents (my wife and I), his grandparents, and his aunts and uncles. We actually have many more toys now than he regularly plays with, so we’ve given a few away and have some others in storage so we can rotate them monthly, giving him the enjoyment of having “new” toys to play with.

As his second birthday is approaching, we’ve been thinking about what sorts of gifts might be appropriate for him. What would he enjoy at this age? The surprising answer is that almost everything he indicates an interest in is very inexpensive. This would likely be his gift list if he were writing his own.

Hot Wheels cars This is his favorite item at the moment. It’s very easy to get a ten pack of these cars at a department store for $6 or $7, and it will likely wind up being one of his favorite gifts.

Paper to draw on He absolutely loves busting out the washable markers and drawing on any paper we allow him to, and sometimes drawing on himself. I am currently actively looking for a blank roll of newspaper for him to draw on, providing him a ton of paper to use to express his creative nature on, giving him some huge sheets to color on and also a lot of paper to get through. A new set of washable markers may also be part of a potential present.

Used children’s books He loves books. He sits on the floor and goes through them himself and insists that we read to him a lot. To sate his appetite, books are a great gift, but I’ve been able to find a lot of used ones. Why not get him five or ten used children’s books (many of which look barely used) instead of one new one, especially considering that he definitely adds wear and tear to them quickly?

A large rubber ball Whenever we see one of these at a department store, he looks, points, says, “Ball,” and then goes into almost a trancelike state of staring at them. I retrieved one for him a while back so he could look more carefully and he would have easily taken it home with him had I not asked for it back.

“Apple juice” Every time I’ve asked him what he wants for his birthday, this has been his response. Guess what beverage will be served at his birthday party?

My philosophy is this: just get him these inexpensive gifts now, things that he actually wants. If someone wants to give him more, then couple it with a donation to his college savings plan. Later on, when his tastes become more expensive (”I want an XBox 720!”), then gifts might change, but for now, if the child’s tastes are frugal, support that frugality.

I know that both sets of his grandparents are giving him larger gifts that are sensible and that’s fine, but for Christmas I’m going to encourage everyone to get him simple things - and if they insist on giving him more gifts, just contribute to his college fund. That way, he’ll enjoy these gifts now, and their contributions will have about seventeen years to grow and will really help him in college. Even better, it will prevent him (somewhat) from seeing Christmas as a giant materialistic gift-grabbing occasion.

What’s the take-home message here? When a child is young (or even when the child is older, if they have the right attitude) and you have the opportunity to give the child a gift, make it a frugal one that they’ll actually enjoy. If you feel obligated to spend more, put some money along with it but earmark it for their college fund. That way, they have something they’ll enjoy now and something that will really benefit them later on.