Financial literacy: Allowances

Published by Lori Pickert on December 1, 2011 at 04:44 PM

At the end of yesterday’s post I asked about allowances — check the comments to see how different readers handle allowances, chores, and the spend/save/donate option.

We handle our boys’ allowances a bit differently. I noticed a few people said that they forget about giving the allowance or the kids forget; one parent gives the kids till Sunday to ask for their money or it’s too late! We don’t even hand out actual money; the boys get $5 a week and we keep an account on the computer. Every so often they check to see much money they’ve accrued. When they receive money as a gift, they usually hand it to me and ask me to put it in their account.

We don’t require them to save or donate any of their pocket money; that’s entirely up to them. Both boys have elected to donate not just money but time and physical effort to causes they care about, so I think we did well there. Letting them have complete control over their money hasn’t made them into greedy monsters. (On the contrary — they’re both very generous!)

Children can learn real lessons from managing their pocket money — the regret when they blow their money on something cheap and flimsy, the thrill when they save for something they really wanted, the pride when they buy a gift for a loved one. You can lecture your kids (imagine Mrs. Othmar in the Charlie Brown cartoons: wah wah wah), but their own experiences will really resonate and stick with them.

We do not tie allowance to household responsibilities. They receive pocket money as a family perk, and they have responsibilities to fulfill because they are a member of the family.

Other than giving them the chance to manage their allowance as they see fit, I told them one story and enforced one rule.

The story:

Two twin brothers inherited $15,000 each from a relative when they were 18. The first brother used his money to buy a car. He was the envy of all his friends. The second brother used $5,000 to buy a used car and invested the other $10,000 (for a modest 5% annual return). After 10 years, the first brother's car wasn't running any longer and he needed a new one. The second brother also needed a new car, but now he had over $16,000 in his bank account. How much would the second brother have if he didn't touch that money again and left it until he retired? Almost $115,000.

This story had a big impact on my older son especially. He immediately announced that he wanted to save his money and he wanted to learn to invest. All kids should be encouraged to play with a compound-interest calculator online — it might convert them all to being great savers!

The rule: You have to declare you want to buy something and then wait one week to buy it. That's it. We call it the one-week rule. There were times when they absolutely hated this rule, because of course it completely eliminates impulse spending. If they had something in their hot little hands at the store, they could only announce they wanted to buy it the following week.

So what happens? You can guess. A week later and most of the time, they have completely lost interest in buying whatever it was. The lesson is imparted by their experience with the rule, not by a lecture from me: If you wait a week, you’ll avoid buying a lot of things that you don’t really need or want! When they complained, we simply said it was a family rule — and it is. We wait on our own purchases as well!

They have both turned out to be big savers; last year my younger son spent two years’ worth of allowance on a single purchase. This, too, is a great life lesson: saving means you can eventually get something really awesome!

Our family culture plays a big part in how we educate our kids about money. We identify ourselves as frugal, as savers, as investors. We say, “In our family…” We share our long-term goals and we talk about our financial decisions.

Just as with learning, we build a strong family identity around our shared values.

How does your family handle allowances, chores, saving/donating?


Comment by Deirdre on December 2, 2011 at 09:37 PM

Ha! I hate being a cautionary tale----yes, they don't get what they don't ask for. I like the computer account idea, but is this your own spreadsheet or a real account? I ask because our concern was we would have to put aside the money or put it in a separate account so that it doesn't hurt our budgeting when they decide, six months or two years later, to spend that money.

Love the one week rule---for myself!

Comment by Tana on December 2, 2011 at 10:21 PM

This is great stuff, Lori. I'm coming at all these topics from a weird angle because I don't homeshcool right now. But I do love learning about learning and I find so much of what you write about to be applicable to just life in general.

What I like most about how you've set up the allowances in your house is that, as you said, it is so in line with the rest of your finances and your whole value system. Doing that is so much easier said than done. It's neat to read specifics about how someone has done it.

In our house, my husband and I come from very different backgrounds. Urban vs. rural. Consumerist vs. DIY. Affluent vs. not so much. Capitalist vs. socialist. Spender vs. saver. Grocery stores vs. giant home gardens. I'll stop now. :-)

We've had to work really hard to find a balance. We were semi-open about money while our daughter grew up, but there was a lot of strife and struggle involved in finances, so it was really hard. I'd love to know how other people handle teaching values (especially money values) when the values in the family are inharmonious.

Comment by Lori Pickert on December 2, 2011 at 11:06 PM

deirdre, hahaha i LOVE your cautionary tale! it's exactly what *i* would do! i didn't want the whole "did you pay me/you owe me!" kind of arguments, thus "the account". but your way works, too. ;^)

it's not even a spreadsheet, it's just a number. lol. very low tech. :) we date it so when they want to know how much $ they have, we just look at the calendar to see how many saturdays have gone by since the last time they looked.

the one-week rule works really well for me, too. :^P

tana, thank you! that's what i'm aiming for! :^)

you're right, it IS easier said that done. i like that people are sharing their systems because i know ours works really well for us but everyone needs the thing that fits right for *them*.

* how other people handle teaching values (especially money values) when the values in the family are inharmonious *

wow - excellent point. i hope someone wants to share about this as well!

for my husband and myself, we've always been more or less on the same page about finances. we are slightly different in that i'm very frugal and he's insanely frugal. :)

i know couples who keep their money separate, but as far as passing along values to kids, wow. that would be difficult if you want to teach them to be frugal and your spouse was a spender!

on the other hand, maybe a more mixed view would lead to less kickback/rebellion. the kids see multiple views and can gravitate toward what works best for them.

Comment by Janet on December 2, 2011 at 11:29 PM

This whole post sounds so right on Lori.

We don't do an allowance for our son (5), but after reading your post I think it may be worth considering. I've always felt that money was for the whole family (not his or hers or son's), and certainly not appropriate as a reward for behavior, chores, or grades (shudder). We are very frugal, manage our money and investments very carefully, so the thought of giving money to a five year old to control seems sort of crazy. : ^

Right now, we buy toys for birthday and Christmas. In between, our system of delaying toy purchases is to make lists. If it's before his birthday, we make a birthday list, then we switch to a Christmas list. What's amazing is that typically the list gets erased and revised many, many times before the big event. His list is usually a fraction of his wishes over the course of a year. Of course, we don't buy everything on the list either. Do I sound like a miser?!

I really like the idea of not handing out money but keeping track on the computer instead. I respond to seeing numbers on paper. For me, having to own up to all my expenditures at the end of the month is a much stronger deterrent to unnecessary spending than having cash in hand that just vanishes without a trace. Although, an empty piggy bank is a fairly startling sight too.

Thanks for the great series of posts. Much to think about.


Comment by Lori Pickert on December 4, 2011 at 01:04 AM

thank you, janet, and please — join the miser club! we don't buy anything for our kids other than birthdays and Christmas. they never ask for anything (and they never did, as little kids) because they had zero expectation of getting anything!

for us, having the money just accrue in their accounts means we never argue about anything. we put in all their expenditures and when they want to know where their money went, they can just look and see. that's an education in itself!

Comment by Dawn Suzette on December 5, 2011 at 01:58 PM

I like the idea of an account on the computer. Funny because we do our checking account on the computer and Fionna LOVES to watch her dad input the receipts and see the numbers change. I think she would repond well to a computer "acount".

Comment by Mary Beth on December 5, 2011 at 04:17 PM

I'm just wondering - do they wait a week even when they want to buy a book?

Comment by Lori Pickert on December 5, 2011 at 04:27 PM

dawn, you'll have to let me know if you try it out. :)

mary beth, great question. :) in our house, books don't fall in the "luxury" or "nonessential" category. they're absolutely essential. :) we do the bulk of our reading at the library — we usually have out about 90 books at a time. we have an extensive home library that is stocked with classic and contemporary and research works, and i *will* buy a book (often used) if they request one they know they want to read over and over again. we also give books as gifts every christmas.

that said, my older son is now 15 and he asked for gift cards for his birthday and spent the entire amount buying books, which was his intention from the beginning. i don't think we need to invoke the one-week rule with him any longer (though he adhered to it in this case anyway), because he's so frugal and so intentional in his spending!

our family habit is to read most books at the public library first and *then* decide whether they warrant being added to our library at home. if it was the next book in a loved series (say, harry potter), we'd skip that step, but usually we read first and then decide to buy.

Comment by Cristina on December 10, 2011 at 02:05 AM

I am loving this series of yours, I finally have a little time to read it!
I have done a similar thing to your rule when it comes to shopping. If they want something in the grocery store that is more of an impulse item (sugary cereal, candy, or something that I would not normally buy) they know that I won't say no to their request, but I won't buy the item unless it is on sale. I think it has helped them to see that various items have a sales cycle. I will also buy it if I just have a coupon, but they know I prefer it if there is a store sale. Bonus if I have a coupon AND the item is on sale. As a result, none of them were ever whiny when they shopped with me, they learned patience, and sometimes they learned that the item they wanted so badly isn't that great after all. :o)

Peace and Laughter!

Comment by Lori Pickert on December 11, 2011 at 07:50 PM

cristina, we also talk about sale prices at the grocery store. :) we stock up on certain items when they go on sale cyclically. i agree talking about this makes them more aware of it. they know, for example, that video games are much cheaper if you wait 6 months after they come out, and they would rather wait and get a better deal!

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