How to set up a kids allowance (part 4)
A year and a half ago, we decided to give our kids some money. More specifically, a kids allowance (pocket money in the Queen’s English). Has it been worth the effort?
A summary of our kids allowance system
Why have an allowance? To help our kids learn about money, including making mistakes while it doesn’t matter. And so that we can tell them to use their ‘own’ money if they are bugging us to buy them something.
How much? €0.50 per week multiplied by their age. For example, an 8 year old would get €4.00 per week (8 x €0.50). Enough to buy some cool stuff if they can exercise delayed gratification for a couple of months.
How often? Every Saturday morning at breakfast.
Cash or bank transfer? 100% cash. Our kids are young and need the visual incentive. Plus it helps them understand and count physical money.
How can they spend it? They each have a jar for sharing, saving and spending. Each week they need to put something in each of their sharing and saving jars, and then allocate the rest however they want.
Any loans / advances? No, no, no.
How do we encourage saving? Interest of 5% per month on their savings.
Any controversial rules? The allowance is completely de-linked from chores. WHAT??? In our view chores are part of being in a family and deciding to forgo an allowance in order to avoid chores is not an option.
LINK to original article setting out our full kids allowance system.
What benefits have we noticed from introducing an allowance?
Our kids have (mostly) stopped asking us to buy them stuff
They know after 18 months that we’ll tell them to use their own money if they really want something. Given I’d pay almost any price to not listen to whining, this one is priceless. Perhaps I should give Mrs C an allowance… (though if she sees this, I’ll be the one that’s whining).
Improved math skills and comfortable with money
The math skills of our oldest two have improved. But our 5 year old twins are still working on calculating how much change they are due. The local ice cream vendor is probably a little tired of Solo questioning why he isn’t getting more change. every. single. time.
Learning from mistakes when the stakes are low
Our eldest spent quite a bit of her allowance in the early days. Some of which was spent on things she’s since admitted were not very good purchases. Better to learn with €20 when she’s 9 than with €20,000 when she’s 29.
The only real mistake is the one from which we learn nothingHenry Ford
The joy of giving
Last Christmas our kids bought each other presents with their own money for the first time. There was real pride at being able to hand a present to their siblings on Christmas day that they had personally bought. And wrapped. Present wrapping is clearly not something they’ve been taught at school.
Happiness doesn’t result from what we get, but from what we giveBen Carson
The power of compound interest
This was a lesson I didn’t learn until way too late. Our eldest is fascinated that the interest she earns on her savings each month is worth over 50% of the allowance she receives.
The pride in delayed gratification, and joy of anticipation
Our kids have all managed to buy things that took several months of saving. When they were finally able to buy what they’d been saving for, there was huge pride in having bought it for themselves.
A lot of the pleasure was wrapped into the anticipation. There’s definitely a learning point there for adults who buy what we want, when we want it, and miss out on the joy we’d get from anticipating it.
The pleasure isn’t in doing the thing, the pleasure is in planning itJohn Green
Have we changed anything in our system?
We have made a couple of tweaks to our system in the last twelve months.
The one area we’ve continued to struggle with is the weekly payment cycle. Weekends are often busy, and it can be a hassle to make sure we have enough loose change every week. So its very easy for Saturday pay day to come and go with out the pay part. The kids still love getting their allowance, but its not the same excitement as when we first started. Not dissimilar to pay day for adults after they’ve been working for several months. Speaking of salaries, I wonder if Mrs C would approve of me introducing the kids to taxes?
Anyway, we’ve decided to switch to a monthly payment schedule. We’ll pay out on the last Saturday of every month, and have added it to our calendar to make sure it’s not forgotten.
At the minute our kids are only allowed to use their savings for one of the things they have on their savings list (maximum of 3). Its been a bit ambiguous when they could change the things they were saving for. We’ve now aligned these changes with the monthly pay day. So once a month they have the opportunity to make a change to their savings list. Which also means that they have to include something on their savings list for at least a month before they buy it. We could all save a little bit of the money wasted on impulse purchases by adopting a similar framework.
Introducing a tiered interest rate
Last month our 9 year old daughter received €9 in interest from the €180 she had in savings. As mentioned above, she is way more excited about the interest than about her actual allowance. This feels like a big win – that she’s enjoying the benefits of seeing your money work for you. This is the whole premise behind financial independence. She told me today that she thinks she’ll be financially independent when she has €300.
An interest rate of 5% per month is going to be unsustainable as our kids save more and more. So we’ve introduced a tiered system. For the first €200 we’ll still pay 5% per month, but above that we’ll drop to 2% per month. Its likely that we’ll continue to tweak the interest rates. We want to keep the incentive, but without bankrupting ourselves.
Calculating interest each month can be a bit of a pain as I had to wait for our eldest two to add up all of their savings every month. Given their interest is riding on it, they felt that they needed to double and triple check. Now, their savings jar has chalk paper on the outside, and they write the total in their savings jar on the paper. That saves time and forces them to work on their adding and subtraction skills.
Future changes / additions to our kids allowance system
As noted above, I think our interest rates will evolve over time until we get to the point where the kids are a bit older and have outgrown the bank of mom and dad. Or more likely, the bank of mom and dad is no longer able to cover the interest.
Aside from avoiding paying out on interest, we also want to make sure they’re comfortable investing in the stock market before they leave home. But that’s not something we need to worry about for the next few years.
Advice for other parents
My advice would be to make a start and keep it simple. Whatever system you start with, won’t be perfect. But you won’t learn what does and doesn’t work until you start. If you find a particular aspect is not working, then keep iterating until you find a solution that works for your family. Every family is different, and what works for our family, won’t necessarily work for yours.
I’d love to hear about your kids allowance systems in the comments. There’s always room for improving ours.