Over the last week or so, my wife and I have been discussing when to start giving an allowance to our oldest child, Joe, who is almost four years old (long-time readers may recall that Joe was still a baby when The Simple Dollar started… where does the time go?). This conversation was spurred on by my recent reading of Raising Financially Fit Kids, along with a small pile of articles and research on the topic.
Here’s the plan we’ve decided on.
First, we’re going to begin his allowance on his fourth birthday. He’s reached a level of intellectual maturity that he now clearly understands that money is exchanged for goods and services. He also often requests items of various kinds at the store – and is told “no” virtually all of the time. Yet, he does see that Mom and Dad occasionally buy unnecessary items (like a book at the bookstore) and is intuitive enough to ask why Mom gets a book while he does not. His allowance allows him to make some basic money decisions for himself.
Second, his basic allowance will be very small. We don’t intend to throw a large amount at him. We’ve decided on an initial allowance of just $2 a week – and he won’t be allowed to even spend all of that in a given week (as I’ll explain below). This allowance isn’t intended to finance exorbitant spending on unnecessary things – instead, it’s a way to teach simple money management to a small child in small amounts.
Third, the allowance will come in three parts – for now. One part will be pure spending money – he can do whatever he wants with it. A second part will be saving for a specific goal, which we’ll let him identify. We’ll keep this in a jar on the refrigerator with a picture of the goal on the jar (and the price). A third part will be for giving – we’ll let this build up for a bit, then tell him about some local charities that he can give the money to to help their cause. We’ll give him his allowance in quarters, putting them one at a time into each group in the order above until they run out. So, at the start, he’ll get three quarters a week to spend, three quarters a week to save for a goal, and two quarters to give to others. The idea here is to teach some goal setting and also to teach the value of giving to others in need.
Fourth, his allowance will grow slowly in proportion to his age. Each year, we’ll increase the allowance by fifty cents. So, when he’s five, he’ll get $2.50. When he’s ten, he’ll get $5. As always, the allowance will be given in quarters and dollars so it can be divided evenly. So, next year, he’ll get a dollar (four quarters) to spend as he chooses, three quarters to save towards a goal, and three quarters to give to a charity. After that, a dollar goes into each grouping.
Fifth, his allowance will be “automatic” – not based on any specific behavior. There are some things that he’s expected to do at our house – pick up his toys, scrape his plate after meals and put it in the dishwasher, and so on. Those won’t be tied to his allowance – if he refuses to do them, his allowance won’t be the source of discipline (“time out” works really well for that, actually). The goal is to teach money management, not to use it as a tool for discipline.
Sixth, we will offer him optional extra chores to do to earn a little more. For example, we’ll give him a large basket and tell him if he fills it up with leaves from the yard, we’ll give him a quarter in each jar. If he wants to do it, he can – otherwise, Dad will get out the rake. Again, the goal here isn’t to get cheap labor (I could clear the leaves WAY faster myself), but to teach him that if you work, you earn financial rewards for it – which also must be budgeted.
Seventh, when he’s older, we’ll introduce an “investing” jar, too. Perhaps when he’s six, we’ll introduce a fourth “jar” into our system, splitting the allowance money into four equal parts. This final “jar” includes money to be invested for the future – not to be touched until he’s done with his schooling. Why so long term? With such a long timeframe, he’ll have adequate time to see how investing in stocks works, how investing in bonds works, how investing in cash works, and so on. Right now, he’s simply not ready for this and wouldn’t see the connection, but we think he might begin to understand it when he’s a bit older.
Eighth, all “gift money” will be split along these same lines. If he gets $5 from Grandma on his fourth birthday, $1.75 can be spent right now, $1.75 is saved for a big goal, and $1.50 is given to a good cause. In other words, gifted money is treated the same as allowance money.
Finally, he’s freely allowed to put “free spending” money into other jars if he so chooses – with a small bonus. This will allow him to push towards a big goal. What’s the small bonus, you ask? If he dumps all of his allowance that week into the “saving for a goal” jar, I’ll toss in an extra quarter to reward good saving. It’s also a hedge for our own sanity – I’d rather he use his money for a few more expensive toys than lots of $0.50 items that clutter the house.
That’s our allowance plan for Joe and, if it works well, we’ll replicate it in a couple years with our daughter. Any thoughts or comments?