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Allowance: The Tax Man Takes a Bite!

There’s a lot of things that you can teach a kid when you start giving him an allowance to manage, not the least of which is the impact of tax and other withholdings on a paycheck.

Tax

By all means, please start out by handing over the entire allowance at first – preferably in cash.  We did this with our kids – when their allowance was just $50 per month.  After handing over the money, we’d say, “Okay, now put $5.00 into savings, and $5.00 into charity.”  This left $40, a 20% reduction right off the top.  We’d then help them to put the rest of the money into their spending envelopes.

It’s kind of like the old phrase, “If you want to teach a kid about taxes, just eat 30% of their ice cream.”

Now that they’re older, and managing more of their money using a prepaid Visa card, much of the transaction happens “virtually” – a transfer from my account to theirs.  The most recent month, our daughter had an eye-opening experience.  She was still in debt to us for her sports registration (she hadn’t saved up enough in advance.)  She looked at her upcoming expenses in other categories, and decided to allocate most of her allowance to sports – she didn’t want to stay in debt another month.  So on allowance day, she had an automatic deduction to her savings account, and automatic contribution to church, and a large payment to her debt.  Her monthly allowance is now $160, but she walked away from the table with two $5.00 bills and a $20 transfer to her VisaBuxx card.  It’s going to be a sparse month – and that’s a good thing.

As they get older, kids and teens will start earning more money, and getting more adept at managing it.  It’s important to face the reality that when payday rolls around, you’re not rich; the tax man, the savings plan, and charities get the first cut.  It’s from what remains that you can repay debt (hopefully it’s not a habit) and finally what’s left after THAT is where you get your monthly budget.

I remember well my first job, earning $4.25 per hour – and being shocked to find that taxes reduced that to under $3.00 per hour.

I also remember well how happy I was working my first “real” job, and earning a bonus – only to find that the tax bill on that was over 40%.

What did I take away from those adventures?  Never spend a paycheck before it’s been deposited, and never underestimate the size of withholdings as your salary increases.  These allowance experiences are introducing those same ideas to our daughter, about 10 years earlier than I started learning them.

 

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