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Most allowance efforts have the unintended consequence of teaching kids to spend and consume; “Here’s some money for the week, or the month—you decide what to spend it on."
This is not a learning experience; it’s a way to get those "can I, can I" kids off your back! We hope by transferring some cash to their pocket we’ll get a little respite from their endless please for stuff and that, in the process, we’ll help them develop economic judgment.
Typical StrategiesRarely does it work out quite so neatly and by now I’ve heard every allowance plan under the sun:
How Kids Acquire Financial Fluency"An allowance is not a salary or an entitlement; it’s a tool for practicing and mastering financial skills." That’s it. It’s a tool for practicing all the basic skills: saving, cash flow, philanthropy, thoughtful spending habits, entrepreneurship, etc. It can be the most important tool in every parent’s toolbox.
The idea of financial osmosis (they’ll "catch on" as they grow older) is charming but deluded. A simple financial vocabulary quiz of twenty or so financial terms would make that clear in any group of adults. It’s the rare child who internalizes the sense memory of a great tennis backhand just by watching someone else; and only the most remarkable prodigy can master complex musical scales just by listening. So it is with financial fluency.
Allowance 2.0, as practiced at Independent Means is characterized in this way:
That is, before starting an allowance, whether the child is 7 or 17, parent and child assess where money is currently being spent in real life. Not, what does the child buy (which is a wrong question that provides irrelevant data), but how much money is the family (mom, dad, grandmother) spending on repeat buys every week or month on things like iTunes; school snacks, hobby’s, indulgences, etc.?
To get this data, you have to track expenditures on little Jane or Jim carefully for a few weeks. How many times did you satisfy a request for snack money or trip to Pinkberry? Did you peel off a $20 bill so she could buy another pair of earrings at Claire’s? Did you fork over $40 because he was going to a basketball game and needed some walking around money? Did you give her money or your credit card to buy a birthday gift for her brother? In other words, what do you routinely subsidize?
Parents are usually shocked to see how substantial monthly expenditures on a child (health and shelter aside) are when tallied up. Whether it’s iTunes charges on your credit card, the monthly bus pass, or the taxi tab if your teen lives in the city, the real cost of a child’s life--the invisible allowance you are already doling out--is considerable. That’s not bad, it’s just real information.
We encourage kids to be oblivious to the real cost of their lives for lots of reasons: our parents didn’t know how to discuss it with us so we have no models for how to teach kids about money; we’re ambivalent about what and how we share financial information; we don’t trust kids to keep family information private. But the consequence of keeping kids in the dark is that they don’t get opportunities to make good choices in context.
An effective allowance will be real—covering matters of consequence in a child’s life.
It’s taken seriously.
I’ve become fascinated (and not a little disturbed) by the extent to which children’s sports schedules have subsumed family life. The family meal is secondary to Suzie’s soccer schedule and football practice routinely trumps the family summer vacation. In children's athletics, recreation has morphed into fierce enterprise. Few question the sensibility of a 6:00 am or a 7:00 pm practice because we’ve decided that children’s participation in team sports is Important, with a capital I.
By contrast, a child’s financial grounding is relegated to one of those things we fit in when we have time; which is usually never. Even the youngest children intuit what is really important in the family by the way parents behave. If an expensive car is more important than a substantial family savings account, that will be clear to the most oblivious child. If baseball practice comes before time spent to review the week’s financial activity, the priority again, is made clear.
Allowance 2.0, as practiced in thought leader families, is scheduled, consistent, and a core part of the family conversation and attention.
It’s fun and engaging.
By now I know that when that moment comes at a cocktail party when some one asks what I do, my response, "financial education in families,’" is likely to result in the sudden need for the other party to freshen their drink! Financial education, in the general culture runs very close to going to the dentist in terms of things we don’t look forward to in life.
I get it. Historically, if and when financial education has ever been attempted, it has been done with all the joy and imagination of a root canal. But that’s not inherent in the topic, that’s just a failure of imagination on the part of the teachers.
Ask kids to get involved in building the budget (a real one, not a fantasy budget) for a tree house, or use the family vacation as an introduction to planning a budget and making choices in the context of that budget; give kids a real allowance and use it to help them build independence and self confidence. Kids respond when they are taken seriously and engaged in real financial matters that matter.
It connects to the child’s values.
An allowance is not just about the money, it’s a reflection of the family’s values and who the child is becoming in the context of what’s important to him or her. If this child worries about homeless dogs, there needs to be a philanthropic activity and money that is allocated to that cause. If your daughter is horse possessed, the allowance needs to integrate horse expenses into her expenses; and if he’s intent on a summer sailing the Maine coast with a friend, there needs to be a savings goal to help make that possible.
No matter how abundant, or limited, the family resources, children need practice making choices in the context of what’s important to them and to the family. Next time young Amanda asks for voice lessons or Sam says he wants a new guitar, the response should not be an easy, "yes or no," rather it’s a question of if that "whatever" is important enough to you that you are ready to rethink your budget?
The message to kids is that financial choices tell us who we are by showing us what’s really important to us. Being forced to make those choices is how kids figure out who they really are, what is important to them.
Sample Allowance 2.0So what does a real allowance look like?
The Balance Sheet. Whether for a ten year old or a twenty year old, we design a real allowance with a balance sheet. For example:
Expenses: this varies with every child, by age and life style. And the list grows over time—each year, the young person should assume one or two more financial categories to manage.
Time. Once you have a list of projections (created in consultation with the child and after some analysis of what has been real in the previous 3 or 4 months, of course), the next thing is to make projections for multiple weeks or months.
This is because, just like grown-ups, kids have cash flow challenges as well. If Sarah’s brother and her best friend both have birthdays in May, her gift expenses will be higher than they may be in June. Cash flow is a tough concept and hard to manage for the most sophisticated—which is why we begin a conversation about it when kids are pretty young. They can understand what it means to have a lot of birthdays for friends one month and none the next—we don’t need to introduce anything higher order than this in the early stages of practice. Very young children may only be able to focus on a few weeks, while teens should be ready to think about a season and eventually a year at least.
Ask kids to estimate the monthly utility bill and they’ll come up with some fantastic guesses ($15K one outlandish, but lately another teen suggested $100K—for a month, and no these were not castles in England). They give these wild estimates because, as one young man told me, “I have no idea what ANYTHING in the house costs!” Of course not. We tell them to turn the lights off, to conserve water, to turn the temperature up or down a degree or two, but we don’t put that action in economic terms—we may judge or lecture their profligate behavior, but not provide context for what it all means.
Saving, Philanthropy. The Rest of the Picture.Parents love the first Allowance Stage—I hear them say, “ We give Jimmy an allowance of $5/week and he has to put some in spending, some in savings and some in giving.” And little Jimmy is, presumably, learning how to allocate money to different responsibilities.
But now Jimmy is 12 and it’s time to ratchet up his allowance plan. How do we integrate philanthropy and savings into the mix? Now we’re back to the importance of helping kids connect money with values. What are you saving for? What issue matters enough to contribute to? These are separate categories, but we assume that kids will use part of their income (the total of allowance, earnings and windfall) to contribute to savings and philanthropy.
Last Words, What’s Practical
Before I get pages of emails from irate parents, a few caveats:
Written by Joline Godfrey, author of Raising Financially Fit Kids
Joline Godfrey has been a pioneer in the field of financial education since 1990. Today she is one of the country’s foremost experts on kids, families, and money. Godfrey is founder and CEO of Independent Means, Inc., a leading provider of financial education for families. Recognized in features for the Today show, Oprah, Fortune, BusinessWeek, and the New York Times, Godfrey is a frequent speaker and consult-ant worldwide. She lives in Ojai, California. Visit her website at Raising Financially Fit Kids.com.
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