Sunday, February 7, 2010

Ideas on Allowances

The Question of Allowance
Since I don’t have kids I haven’t had to deal with this. But I want to offer some other perspectives on how to handle allowance.

From “Money doesn’t grow on Trees” (A Parent’s Guide to Raising Financially Responsible Children) by Neale S. Godfrey.
How to Determine the Amount of the Allowance
Once you’ve decided that an allowance is a useful teaching tool and that your child – even one as young as three-is ready to begin “earning and learning”, then you need to formulate a starting “salary”.
For her children she started them on an allowance whey they were three and six years old. Using an easy rule of thumb: their allowance was the same number of dollars as their age.
There are three basic areas of money management we will be working on in this book. The S.O.S. system, Briefly they are:
1. Savings. Some portion of the allowance needs to be allotted for both short-term savings, like a special toy or out, and long-term savings, such as for a bicycle or college fund.
2. Offerings. This is a small amount of money set aside for donations to charity or to the less fortunate. However small the sum, it is a valuable way for parent to teach personal values through money by showing the child how to share her good fortune.
3. Spending. Depending on the budge you develop with your child, part of her spending money may go to cover specific expenses. It can range for lunch money or bus fare for young ones, to total management of a year’s clothing budget for more sophisticated teenagers. At any age, however, there needs to be some money that is the child’s discretionary fund to spend as he wishes(with whatever limitations you set)
Think about your own financial priorities. What percentage of your budget goes to saving, to charity, and to spending? Would you want your child’s priorities to be similar to or different from yours? For example, would you like to see your offspring save more (percentagewise) than you are able to? If areas such as saving and charitable giving are important to you, then you may need to increase the amount of the allowance for the youngster to accomplish this.
Share with your children all ways money can work positively: it works to cover immediate expenses, like lunch money, it works to build for the future, like saving for college and it can be shared with others to help those truly in need.

The Four-Jar Budget System
This is how it works.
First, an allowance is “work for pay”. You’ll set up a series of chores (very simple ones for the youngest, more responsibility for older kids).
Second, allowance is paid once a week, at a specified time (ritual is important). Make sure that you have the money on hand, in small denominations.
Third, the money is divided among these four jars (or other type of container or envelop)
• Jar one is for Charity (family members get to pick their own)
• Jar two is Quick Cash. Your child can spend this any way he wants (subject to family rules).
• Jar three is Medium-Term Savings, which means anything that costs more than one week’s worth of Quick Cash.
• Jar four is Long-Term Savings. For a child, this generally means a college fund.
Now for a few details.
Charity comes first. It’s 10 percent off the top, so make sure your first allowance structure is set up in such a way that you can take 10 percent and divide the rest by three. Three dollars for a three-year old works perfectly for this. Thirty cents for charity leaves ninety cents for each of the other three jars.
Quick Cash can go for whatever the child wants to spend it on…within the limits of your family rules. If you don’t allow bubble gum or comic books, then the Quick Cash can’t be spent on those things.
Make a Medium-Term Savings plant with your child. Go window-shopping at your local toy store or dollar store or on the Internet. You’re teaching deferred gratification, but you’re also teaching gratification.
Long-Term Savings gives a child a sense of investment in his own future. As soon as you move Long-Term Savings from a jar into a bank savings account and eventually into investments, that becomes more than just an exercise-it’s real life.

Chores and Allowance
“Work for pay” is defined as chores that are over and above what is naturally expected of the child. Your child must know that we’re a family, we’re all citizens of this household, and some chores are “Citizen of the Household” chores. You’re expected to chip in and do them.
Work for Pay
“Work for pay” means exactly that. Your children are expected to do all of their chores, or else no allowance that week. And there’s no prorating, no negotiating, no “I did half my chores, can’t I get half my allowance?” You’ll find that once a kid misses her chores for one week and loses her allowance, it’s not likely to happen again – especially if you’re not buying a couple of “ I want, I wants” every time you go to the supermarket.

Dave Ramsey at prefers to call it commission instead of allowance. The concept of paying and saving are basically the same as the one above.

One product he sells is Financial Peace University which consists of an instruction manual, Commissions worksheet, envelope system, audio CD, etc.

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