5 Ways Kids Allowances Can Fail – And How To Avoid Them

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After The Bathtime Incident last week, I’ve been reading a lot about allowances. It’s clear that our approach is not working – and I think a lot of other parents are facing the same situation. For example, the T.Rowe Price Parents, Kids & Money Survey last year found that the majority of kids spend all their allowance at once and 39 per cent always or sometimes come back for more.

I’d been feeling quite smug about the fact that we are even proactive enough to give our kids an allowance.  According to Busy Family’s Guide to Money (USA TODAY/Nolo Series), a survey by Yankelovich showed that fewer than 60 percent of children ages 6 to 17 even get any allowance.

But here’s where we’ve made some fundamental mistakes and how you can avoid them:

  1. Not agreeing upfront what the money can be used for before setting the amount – We jumped straight into deciding on the amount to give without figuring out what T and M should pay for with their allowances. The general advice seems to be give a child $1 for each year of age or give what feels right for your family finances. From the start, we felt $5 per week for a Kindergartner was too much so we came up with our own figure. But Z and I didn’t talk about what this would cover.
    Consequently, the allowance does not have huge value for the boys. Mom and Dad buy practically everything for them. When we refuse to buy a soda or pay for that stupid crane vending machine game at the supermarket, they cheerfully fork over their money without any consideration. We’ve been missing the budgeting and money management opportunity of the allowance.  

    SOLUTION: I like Janet Bodnar’s approach. Bodnar, who is deputy editor of Kiplinger’s Personal Finance magazine and writes the “Money-Smart Kids” column there, suggests giving kids a base allowance which is not tracked directly to chores. In an interview with TrueCredit, she recommends starting with a base allowance that’s equal to half the age of the child and allowing it to grow depending on age and responsibilities.
    Bodnar also says that instead of being linked to chores, allowances should come with financial responsibilities. “Young children, for example, could be responsible for buying their own collectibles (trading cards, gel pens or other things they like to buy), or popcorn at the movies. Older kids should pay for their own entertainment and mall excursions with friends. Teenagers should have a clothing allowance.”
    We need to have a family discussion about what the financial responsiblities are for our boys and fine tune the amounts based on this.

  2. Not tracking money in and money out – We’ve been giving a weekly allowance to T for more than three years now and to M for a year and a half.  They have no idea what they have spent it on or even how much they have received. Neither do we.
    I want to have conversations with the boys where we talk about whether they felt the item they purchased turned out to be worth their money. I want to be able to point out that if they hadn’t spent money on X, Y and Z, then they would now have enough to do this latest thing they want most desperately in the whole wide world. But I can’t because all I know is how much money they have right now.

    There are a lot of different ways of tracking allowances online. I’ll be checking out FamZoo, MoneyTrail, Zefty, Family Mint and ThreeJars to see if one is the right fit for our family. This would also help with the frequent problem parents have of forgetting to give the allowance as we could set everything up automatically.
  3. Not giving opportunities to earn extra money – Z and I were uncomfortable with telling our children that we would pay them an allowance to do chores around the house. We’re in the camp that everyone in the house should pitch in with the running of the household according to their ability. They have a list of chores that they have to do, no pushback allowed.
    This means that their allowance comes with no strings attached. Our reason for giving it is to provide them with the opportunity to manage money. What we’ve failed to provide are lessons on how to earn money.

    Janet Bodnar’s approach also covers this. She recommends offering to pay kids “for “extra’ chores such as mowing the lawn, cleaning out the garage or whatever you consider beyond ordinary day-to-day tasks.” We’ve just introduced this in our household.
  4. Ruling that they must divide their money between Spending, Saving and Giving (and ruling what the allocations should be) – Of course this approach appeals to parents. We feel good that we are teaching them philanthropy. We feel great that they are saving their money for the long term – we’ve told our boys that they will be allowed to use their savings when it comes time to buy a car or to go to college.
    How to kids feel? According to David Owen in his book, The First National Bank of Dad: A Foolproof Method for Teaching Your Kids the Value of Money, “Saving is meaningless unless it’s voluntary. … If you automatically impound a chunk of your kids’ allowances every month and whisk it off to the bank, your kids will never think of the confiscated chunk as theirs  …” and “Charity isn’t charity if the gift is not the giver’s to give.” By not giving the kids power to make their own decisions about how much to save and how much to give, they are not learning anything about saving and giving.

    This one is a bit trickier. We’ll need to rethink what our overall approach is going to be. David Owen has hit on a key point: the average savings rates at banks is pitiful and not conducive to encouraging kids to save. I watched as Z showed six year old M how much was in his savings account a couple of days ago. “Look, you got 12 cents interest,” said Z. “12 cents?” said M. “That’s it?”
    I like David Owen’s approach of creating his own First National Bank of Dad and paying the kids 5 percent interest every month. We all need the quick hit result to motivate us to do more.
  5. Not giving them the freedom to make mistakes with THEIR money – One of the best reasons to give an allowance is to allow a child to learn from their own mistakes. Realizing that blowing $50 on that video game was a waste of money and that they have fallen for some slick marketing is a whole lot better than realizing that getting into $100,000 worth of debt at 29 was a really bad idea. Writing this blog has made me realize that I am constantly jumping in and saving the kids from making potentially bad money decisions. Consquences are much better lessons when they are experienced rather than warned about.

    Hand over control of their money to the kids. Let them learn real lessons from real experiences. (And then share them all with Growing Rick Kids readers!)

My thoughts on allowances are still a little messy right now. I can see where we’ve gone wrong. I’m still working out what the next solution will be. As with all things in parenting, it will need to evolve as the children grow up. The next step will likely be to have a conversation with Z about what our goals are with the allowances. We can then measure potential solutions against these and identify what’s going to work best for us.

What are other mistakes parents make with allowances?

6 Responses to 5 Ways Kids Allowances Can Fail – And How To Avoid Them

  1. Love the budget-based allowance approach in #1 instead of setting an arbitrary amount – particularly as the kids get older. We’ve had great learning experiences with clothing budgets/allowances with our teens.

    For #4, we’ve had conversations with each of our kids and had them choose the splits for spend/save/give. The conversation itself is valuable. They’ve chosen different split percentages for different valid reasons, and they’ve modified them over time. I think that’s healthy. We encourage the concept of splitting and balance, but try not to dictate the proportions.

    We’re delighted that you’ll be evaluating FamZoo along with the other offerings. I don’t think I’ve seen a single detailed post comparing the pros/cons of each service. Such a post would be very helpful to families who are discovering this growing niche. Don’t hesitate to contact us if you have questions – we’re always happy to help.


  2. Re: #4 – I don’t remember where I learned this tip, so feel badly not being able to attribute it back to the original author – however, we have a Help Wanted sign with the extra things we would like done and how much we will pay the kids. The kids can then choose to earn the extra money,decide if it’s worth their time, etc.

    As an example: A couple of ours are picking up dog poop and sorting socks.

  3. Sounds like there will be some excellent financial discussions at your house!

    As a parent, I have made all five of the mistakes that you have mentioned. I think that mutually agreeing on what your child’s money will be used for and then giving them the opportunity to succeed or fail within those parameters are keys to successful money management skills. It can be so difficult to sit back and watch your child make a mistake! When my daughter was 6 years old, she saved $25 (twelve weeks’ worth of allowance!) and ordered a battery operated sewing machine. I really tried to talk her out of it, but finally relented and it turned out to be one of the best learning experiences with money that she had. She had visions of making all of her own Barbie clothes! However, the sewing machine was difficult to use and broke after a week’s worth of attempts. She was a much more careful and thoughtful consumer after that! (Mommy note — that sweet little girl will be going off to college in 2012. *sigh*)

    Thanks for including MoneyTrail in your options of online allowance management systems to investigate. You have pulled together a great group of resources and I hope that one of us can meet your family’s needs – now and as your kids grow older. I, too, think that a comparison of the different resources could be very useful for families who are looking for allowance solutions.

    I truly enjoy discovering how different families approach allowance, money, chores, saving, etc. I hope that you will continue to share your adventures with us. Please don’t hesitate to email me if you have any questions about MoneyTrail.

    Take care,

  4. Great article and highly valuable tips shared in this blog post. Despite the fact that I am an experienced mother of 3 kids, who knows almost everything about raising kids, I find it interesting from reading this story. I have benefited signifficantly from it, thanks!

  5. […] Rich Kids did an excellent write-up on “5 Ways Kids Allowances Can Fail—And How to Avoid Them.” This was a little older post, but I couldn’t help but share it this week, just because it was […]

  6. […] in recent weeks, I’d begun to question whether this was the right approach. In particular, I borrowed “The First National Bank of Dad” by David Owens from the […]

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