Sunday, June 5, 2011

Allowing for Allowances

A Progressive Allowance Plan for Raising Children Who
Give Generously, Save Frugally, and Spend Wisely

"Dad, can I have an allowance?"
"Sure, son, I'll allow you to go get a paper route."

Times have changed. But the basic dilemma over whether to offer kids a monthly cash allowance has not. Let me start this discussion by saying that Laura and I have a stated goal of helping our kids grow into responsible, faithful maturity in all areas of life. We want them to head off to college with practical experience managing money so they can be financially wise and responsible, not held hostage by long-term financial damage or consumer debt.

Our hope is that, by the time they leave our home, our daughters will have learned basic money skills in three areas: Generous giving, frugal saving, and wise spending. How do we accomplish this?

Money Pits – The Problem with Allowances

Most parents view chores as an integral part of being in a family - everyone pitches in toward the healthy maintenance and overall well-being of the home. While this is a foundational approach, we should be careful with any system that ties allowances to specific chores. Doing so can shape kids who, when asked to wash the car, reply, "Well, for how much?" Monetizing basic responsibilities around the house is a sure-fire way to churn out kids who expect to get paid to be helpful.

Likewise, the historical data around unconditional allowances is no more encouraging. Regarding homes in which children receive an allowance without any expectations of responsibility, the data reveals that these kids…
Were no more likely to save money than those who received no allowance
Viewed the idea of working for money less favorably
Scored worse on a national financial literacy test
Show a lower participation in the labor force and an increased sense of entitlement.

So, if tying allowances to specific chores is as problematic as offering unconditional allowances, what else can a parent do?

Consider what we call a progressive allowance plan. The underlying principle is that a child’s allowance grows with the years in proportion to his or her ability to handle more responsibility.

Rather than tying allowances to chores, we frame it in the larger perspective of being part of our family system. To be in our family means that you share in the responsibilities of our home. Everyone pitches in. And everyone, in a basic sense, goes to work each day. Dad goes to the office, Mom handles home and local responsibilities, and the kids go off to school. And, as a result of everyone sharing the load, so too everyone gets to share in the blessings that God provides for our family. Everyone eats, sleeps with a roof overhead, wears comfortable clothes, and everyone gets a bit of the financial bounty that comes into our home from the Lord.

In order to keep the ideas of responsibility and blessing tethered, we withhold our daughters’ allowances if we felt that they were not contributing appropriately to the family. By doing so, we avoid the situation whereby our kids shirk their responsibilities at school and home, but they get the same allowance regardless. We also resist an allowance plan that would lead us to say, “You washed the car but you didn’t clean your room, therefore you only get 80% of your allowance.”

The Progressing Allowance Plan in Action

How does a progressive allowance plan work? With each year, starting in 1st grade, our kids had some basic responsibilities around the house in addition to their schoolwork. Making beds and feeding the dog are simple tasks within the scope of a 6-year-old. In return, our kids got an allowance of $10 per month that year.

While that may seem like a lot to give a 6-year-old, we required them to give at least one dollar at church, and to put at least one dollar in a savings account. (Remember that teaching generous giving and frugal saving are two of our stated parenting goals.) We found it interesting that they consistently donated more than one dollar - and we didn't complain a bit! We want our kids to grow up with generosity in their hearts. For special offerings - like a donation drive at church for missions - we encouraged giving by matching whatever they chose to give, thus doubling their donation. On one occasion, both girls wanted to give to a China Missions offering. We laid out the fund-matching scheme, thinking they would give about five dollars each, and we would pitch in an extra $10 to match. We heard them upstairs counting money, giggling and talking about it with each other. How surprised do you think we were when they came down and announced that they wanted to give FIFTY dollars to China missions?! Well, we weren't nearly as surprised as the Children's Minister at the church when Molly & Claire showed up with $100 in cash! I pray to God that they will always be so generous.

Regarding the money that they save, we opened a savings account at our bank for each child and seeded it with a minimum balance. Each month they decide how much they want to deposit into long-term savings. Often this turns out to be two or three dollars, which is 100 - 200% more than we require of them. Some parents go further to encourage savings by offering a “fund matching” incentive for every dollar socked away. As their math skills have grown, we have been able to teach our kids about the cumulative benefits of saving. Of course, "compounding interest" is lost on them, especially with current bank interest rates! But they are experiencing the monthly discipline of saving which will benefit them for a lifetime.

Now, back to the $10 per month in 1st grade. If they give away $2 and save $2, then they really only have $6 to go out and spend. We have tried to give them full permission to spend those dollars anyway they desire. Why? Because they began the month by giving and saving. The rest is theirs to spend, earned, in a sense, by their responsible contribution to our family system. Of course this led to frequent trips to the Dollar Store where they bought countless “treasures” that broke in the car on the ride home. Did they learn anything from that? Probably not at the time, though we have heard them say, “What a piece of junk! I shouldn’t have wasted my money on that!” By giving them permission to spend the rest of their allowance as they desire, both girls have shown an increasing amount of discretion. This has opened the door for many conversations about wise spending.

The Mechanics of the Progressive Plan

Here is the "progressive" part of this allowance plan. When they started 2nd grade, we gave them each a $5 raise. Now, before you freak out over a 50% increase, remember that our goal is for them to learn financial responsibility AND to take on more financial responsibility over time. We’ve added chores to their list, and we’ve expected them to pay for more of the things that they want. Even in 2nd grade, if they really wanted a book from Barnes & Nobles, we would ask, "Do you have any of your allowance left to spend?" By giving them more spending potential, we gave them more responsibility for the cost of items they wanted. I don't think either girl ever questioned that we would take care of providing what they need, but they quickly learned that they would be asked to spend their allowance on items that they wanted.

Play this out over the course of a child's educational career - a $5 increase per grade - and what’s the commitment? By the time our daughters are high school seniors, they will each get a $65 monthly allowance. While this may seem like a lot, our girls will also shoulder much more of a load at home. Eventually they will be responsible for helping take care of the car, tend to their laundry, and participate in meal preparation for the family, among other things yet to be determined.

Regarding financial responsibility, their increased allowance will force them to make critical choices about discretionary spending. We will provide some basic money for reasonable clothes. If they want to upgrade to designer labels it will be on their dime. We will provide them with a basic line on our family cell phone plan, and they will pay for the texting or data plan on the phone. This notion of increased responsibility also means that they have to solve any problem that carries a financial burden. For example, our teens will have a modest car to drive, but if they wreck the car and the insurance premium goes up, they will pay the difference. If they get a speeding ticket (following in dear old Dad's lead-foot-steps) they will have to pay for it (even though dear old Dad did not :-).

The net result? Every month our kids will have to make spending choices, "Do I want to pay for that movie now, or would I rather save up for that new snowboard I want?" "Would I rather commit to a monthly texting plan for my phone, or have more flexibility in my clothes budget?" That is exactly the kind of choices we want them to learn how to navigate.

The First Bank of Mom & Dad

Structuring a progressive allowance system like this also opens the door to introduce our kids to basic concepts of banking. Eventually, I expect that each child will open a checking account and learn how to use a debit card. When that happens, we will teach them about online banking and checkbook balancing. We have started to offer higher-interest savings incentives and lower-interest loans.

Here’s how it works. If you child wants a new iPod, try giving them an incentive to save toward buying it. If it costs $100 and your child gets $25 a month of allowance, factoring in for giving and long-term savings with $20 of extra to spend, it will take your child 5 months to save enough. You can help them learn the value of delayed gratification by offering them a one-month interest incentive for saving toward that purchase. In other words, write out an agreement that if they choose to save toward the new iPod for four straight months, you will give them the extra $20 to make the purchase. We actually did this with Molly, our daughter who chronically blew all of her extra money at the Dollar Store. You can't imagine the celebration in our home when Molly got to buy her first expensive electronic toy. It is all hers, and she felt so proud over exercising spending discipline for so long!

On the other side of the banking equation, you can also encourage financial responsibility by offering low-interest loans. Let's say your son wants that “totally awesome” new bike. It costs $144, and he gets $30 per month allowance. Again, factoring for basic giving and long-term savings with $24 extra to spend, it would take him 6 months to save that much. Or you could structure a simple loan that allows him to save for two months ($48) as a down payment, and then pay out the rest over the next 4 months while he enjoys his new ride. Feel free to tack on any "bank interest" fee for him to pay during month 5 before closing out the loan! The best part about this situation is that if your son "defaults" on the loan, you can sell his bike on Craigslist and recoup your cash pretty easily.

What does a loan like this do? It opens the door for your child to learn basic banking concepts like down payments, loan payments, collateral, and that all-so important word - REPOSSESSION! By the way, be sure to put all of this in writing and have your child sign it so that when the Grim RE-PO man shows up and swipes their gear, you can lovingly remind them of the arrangement. Their future bank will certainly not be so kind.

Allowing for a Final Thought

In conclusion, let me simply say that we didn't come up with some magic formula that led us to start with a $10 per month allowance with a $5 per year increase. You can start out at a different amount and offer different adjustments. In the end, the basic premise stands; choose an allowance system that teaches your kids that with increased benefits comes extra responsibilities. And that, with each passing year, they can learn how to give generously from their own wallets, they can save frugally toward a future goal or dream, and they can spend wisely.

That's the kind of child we want to see going off to college.

No comments: