Kids' Allowance, 70/30 Plan

We pay our kids a monthly allowance of $30 each and when payday comes around, they are genuinely excited to be paid for their efforts in doing their regular chores.  By paying a regular allowance on a monthly basis, we are teaching them many lessons that are crucial to setting them up for a secure financial future.  It is our hope that the habits that we instill in them will carryover into their adult life so that they can have an easier time adjusting to a complex grown up world.

Payroll Deductions

While our children (six and ten year old boys) will gross $30 for a month of labor, they only net $21.  The $9 in payroll deductions we take out are no different than what workers experience when they receive their paychecks.  By taking out 30% of their paycheck, we are forcing them to 'live off' of only 70% of what they make.

Monthly, Not Weekly

With their newly reduced paycheck that is now only $21, they have the ability to do with it as they please.  Each of them keeps track of their own money, and trust me when I tell you that they are keenly aware of their cash on hand.  They count it frequently, weighing purchasing decisions with the costs in mind.

In addition to making them think a little more about what they buy, we are also making the purchasing decisions more difficult because they have enough money on payday to buy a wide variety of items.  Paying monthly results in larger paychecks so they are no longer limited to just the garbage toys that cost five dollars or less.  They recognize that they have the very real potential to purchase bigger ticket items if they can just wait one more payday.  This added complexity more closely approximates decisions they will need to make many years down the road.

No Payday Loans

This is all very nice so far, right?  Well, they are still young, so about a week or so before payday, they are inevitably broke.  This last week before new money flows in is sometimes annoying, as they will ask for an advance on their paycheck.  We decline these requests and let them know that it was their decisions that led them to the poor house and they'll need to do a better job next time.  By doing this, they are learning personal responsibility and that they'll need to stand on their own without our help.

Savings to Investing

At this point, we are keeping their payroll deductions in an envelope that will result in a conversation at the end of the year.  We will discuss their total savings for the year that will amount to $108 each and see what they would like to do with it.  The offer will be a choice of either putting the money into an investment account that we will match or taking the money to spend as they please.  This is the ultimate test to see if they've made any progress and fine tune our teaching methods.

While we're offering a pretty serious incentive for them to put the money into a long-term investment, this isn't too far from reality, as many employer sponsored retirement plans offer a match for contributions made by employees.  We hope that this will help them understand that getting ahead and becoming wealthy can be accomplished with help if they make good decisions.  (plus, we're putting the decision in front of them just after Christmas when they'll be flush with toys and gift cards)

It Starts with Financial Literacy

While we as adults know that it makes sense to save money for the long-term, ensure that there is money left at the end of the month, and take advantage of savings match opportunities, our kids are just starting to sort all of this out.  Actually, most adults are still trying to sort this out too.  

The fact is that most adults reach retirement completely unprepared.  The root cause of this can be found in the fact that most Americans are financially illiterate.  My wife and I take this seriously and we are making sure that when our children leave the home, they will be prepared with the knowledge to succeed in a complicated financial world...and if they take us up on our matching offer, they should have a decent pile of cash to boot.

Comments

[Michael Harr]

@ Saver in the City We skipped the INGDirect Option because by having physical cash (most of it in small bills), the kids can better see the money piling up. I believe this is one of the key components missing from teaching kids about money today--tangible value. By being able to see it, touch it, count it, they are better able to see and connect with the value of saving. Of course, it will eventually be moved to a brokerage account, but in the interim, they can see the value of what they've saved. This will certainly outweigh the $1.78 in interest from ING.

Thanks for the post!

[Saver in the City]

Rather than put the $9/month in an envelope, why don't you open up an online savings account for them at ING where they can watch it earn interest? Granted, 1.65% interest on $108 annually is not that much, but it shows them one of the benefits of saving money versus spending it.

[Katie]

I love this idea and will start when my 3 1/2 year old turns 5. That is the magic number for everything. He will be able to get on the top bunk at five, receive an allowance, have sleepovers, chew gum, have soda, etc. 2010 should be an interesting year.

[Michael]

I'm always interested to see how other people handle the issue of allowance and of teaching children about money in general. We haven't done anything like the payroll deductions, but I'm intrigued by the idea. We do encourage the children to pay a 10% tithe and 10% toward long-term savings, which for them is more of a college fund than a retirement fund. That leaves 80% of their allowance as "fun" money that they can do whatever they want with.

I really like the payroll deductions as a way to encourage and teach about investing options and matching. That is one that I may try to incorporate.

Great thoughts. Thanks for sharing.