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The Great Allowance Controversy

Allowance definition graphic

 

Allowance – seldom has one word caused so much confusion and debate among parents.

Allowance is not…

Some see an allowance as a free for all: “Wonderful child, thank you for gracing us all with your existence. Here: have some free money.” It is not free money!

Some see it as a way to bribe their kids to do work around the house. For the love of all things parenting, stop bribing your kids. Right. Now!

Some see it as too difficult to remember, to manage, and to implement to make it worthwhile. Listen, if you potty trained them, you can handle this. Much less messy.

Very few people see it for what it truly is: one of the most powerful learning tools parents have in their arsenal to teach kids about money.

Let’s think about this for a minute:

  • Among adult children, 36% are moving back home because they can no longer afford to live on their own.
  • Credit is available to kids as young as 18. These are kids who have often never been taught how to track and manage expenses or even how to write a check, let alone what debt means or what interest payments will cost them.
  • Parents are cashing in retirement savings and delaying retirement in order to help their kids pay off student loan debt or just make ends meet.
  • 69% of parents are very/extremely concerned with setting a good financial example for their kids according to a 2015 study conducted by T. Rowe Price.
  • That same survey says that 91% of parents think kids should learn more about money in school.

So let’s break this down. Parents know in their hearts their teens need to learn more about money. These same parents are spending their own savings to bail teen children out of financial mistakes they should have taught them to avoid in the first place. Yet they continue to do nothing to teach their kids about money because they think the schools should just take care of it.

There are so many problems with this! First of all, most schools don’t do the personal finance teaching the parents would like to see. There’s no mandate in most states so it doesn’t happen. Period.

Second, parents are the ones the kids see spending money. They are the ones who give the kids money, who shape the kids spending habits, who have the ability to say “No” when the spending gets out of hand. Can you imagine a school trying to step in and ask a parent to give their kid money to practice with for a budget activity?

Finally, kids learn by doing and by learning from their mistakes. Heck, just about everyone learns life skills that way. Learning about a budget in a classroom or on a piece of paper isn’t nearly as effective as learning about it by overspending on a pair of jeans. A well-thought out allowance is a golden opportunity to give kids the money they need to learn these lessons.

Allowance is…

At Allowance Academy, we recommend allowances be distributed to kids who know and understand the following things:

  • What their allowance will cover
  • How often they will be paid
  • Which household tasks they are assigned to in order to maintain control of their allowance
  • There will be no argument or reminders about the household tasks
  • The allowance is YOUR (the parent’s) money

Let’s look at this a little closer.

What their allowance will cover. Before you can determine how much a kid should receive as an allowance, you need to determine which expenses you’re going to make the kid’s responsibility. If the allowance merely covers entertainment, it will be much smaller than if the kid is also responsible for paying for their clothing, shoes, and activities.

How often they will be paid. Young kids, or those just starting out should start with a small allowance paid weekly. As kids get older and are responsible for buying more of their own things, the allowance should get bigger and be paid out in a similar way to their parents’ pay cycle – monthly is ideal.

The household tasks they must complete to maintain control of the money. Remember when we said allowances are not free money? This is where the work comes in. Decide which jobs around your house kids are expected to do as a member of the family. Make their bed? Mow the lawn? Empty the dishwasher and do the dishes? It’s really up to you. These are the tasks the kids should be doing to receive their allowance.

It’s important to remember they’re not doing these chores to earn the money, only to get the money. Doing the chores shows they are responsible and can be trusted. If they choose not to do their chores – that is, if they choose not to be responsible – you’ll still be putting money aside for their clothes, shoes, and activities. But if that happens, you will get to manage that money and make the spending decisions, not them. Most kids who start down the road of managing their own allowance relish the freedom and independence of managing this spending, and will quickly return to the wisdom of demonstrating personal responsibility through contributing to household chores.

What about earning extra money? If you would like them to learn that hard work pays, that’s fine. Pay them to do extra jobs around the house that are either your job, or jobs you’d pay someone else to do: wash windows, paint, landscape projects, clean out the gutters. This is a great way to reinforce the idea that hard work has rewards, without costing you, the parent, anything extra. Your kid is either freeing up your time, or replacing some labor you’d be paying someone else to do.

The allowance is THE PARENT’S money. Ahhh… this is the true key to how allowance works. Right now you are spending money on your kids. You are probably buying their clothing, paying for after school activities and maybe even funding their school lunches. With an allowance you will simply take this money, one category at a time and give it to the kids to manage. You are not spending any extra money on them, you are simply giving them the money you spent on them anyway to spend as they see fit.

Kids who are given this level of independence quickly learn that if they are given $100 for school clothes and they spend $80 on a pair of jeans, they won’t have enough to buy the rest of the clothing they need. If you allow them to suffer the consequences of their poor spending choices, it won’t take long before they figure out that a bigger wardrobe means less brand name items.

Likewise, kids who are given $300/year for after school activities, will realize that they cannot afford to participate in dance, gymnastics, and horseback riding all in the same year, unless they find a way to earn some extra money. This is a useful lesson for kids to learn. In the same way that you and I cannot afford to do every single thing we want to do (well, at least I can’t), it is okay to have discussions with your kids about the fact that sometimes in life we need to pick and choose what is important. To do otherwise teaches kids that the sky is the limit when it comes to spending and that they should never deny themselves anything. This is a terrible habit to start.

The Hidden Benefit of Allowances

A kid who is on an allowance and associated budgeting system learns to manage money in a controlled environment – before they are out on their own. That in and of itself is a huge benefit! Who doesn’t want kids who can move out and live without financial worry?

The hidden benefit of allowances, however, is that they also greatly reduce the arguing in most homes. Many of the arguments we face with our teens revolve around control. By allowing your kids to manage their own money, you are giving them a huge amount of control over one very important part of their lives.

Imagine what your life would be like if your kids didn’t need to come to you every few days looking for money to go out, money to buy clothing, money to register for something at school. That is not only a very powerful feeling for them, it will also be a stress reliever for you. It is also a way for them to get used to having to make tough choices. It isn’t uncommon at all for some kids to not want this control – they’ll ask their parents to go back to handling their money. These are usually the kids who need to begin managing their own lives the most.

As a parent, you’ve taught your kids many things: to read, do simple math, maybe even helped them learn to play an instrument or sport. Teaching them about money is no different: it is one of the most important, most practical life skills you can spend time on. What is holding you back?

If you are looking for a place to start, we have some great resources for you. You may want to check out our FREE Cheat Sheet to Setting Up the Perfect Allowance to get you on the right track.