The 5% Difference To Kids Allowances That Delivers Powerful Lessons

“How much do you get for your allowance each week?” I asked T.

“Three dollars,” he replied promptly. I looked at my husband. “Well, that clinched it,” said Z.

In fact, T was receiving $6.00 per week in allowance. Following the Spend-Save-Share guidance I’d read about so many times, we had decreed that he would be allowed $3.00 in his Spending jar with $2.00 going to Saving and $1.00 to Sharing (or charity). Each week, we handed over the money and he dutifully divided it up between the three jars.

But 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 library to see if I could figure out a new system.  I’d first come across this book a few years ago in a post over at The Simple Dollar.  My boys were too young then for me to spend time investigating it further.  Luckily, a recent comment by Bill Dwight at Famzoo reminded me of it again.

The biggest lesson that Z and I took away from the book is that the Spend-Save-Share approach doesn’t really teach children anything. It just makes parents feel good. We may not be able to manage our own finances perfectly, but, darn it, the kids are going to do it right.

However, to kids, the money going into the Save and Share jars was never really theirs to begin with. They didn’t decide to allocate their allowance that way.

The closest analogy would  be that the Save jar is the adult equivalent of Social Security. Money is put in there out of our salaries but we don’t decide how much and we have no idea if we’ll ever get to see it again.

For the Share jar, an analogy might be taxes. The government takes money from our salaries and redistributes it to where the need is greatest for our country (imperfect though the system may be).

Just like adults who don’t focus on their total salary, just what’s left over each month, kids quickly realize that the only money they control is in the Spend jar. Hence T’s declaration that he gets $3.00 per week.

We realized that we needed a new approach if we were to give our children the true experience of learning to manage their own money.

Introducing Our New Allowance System

After several discussions (and heavily reliance on The First National Bank of Dad), Z and I have decided to become bankers. We now have our own Bank of Mom & Dad.

Even better, we offer 5% interest on all funds in the account at the end of each month. To open an account, I have to have given birth to you so we’ll be limiting ourselves to just two customers.

The 5% interest idea was the other key takeaway for us from the book.  As Owen notes:

“The lesson to be drawn from my kids’ experience is that children will save all by themselves – without coercion or tedious moralizing from adults – as long as their money is allowed to grow fast enough for them to notice the effect.  All we have to do to turn our children into savers is to give them an incentive that seems like an incentive to them.”

Our boys now have a compelling reason to save.  They can see that the more they have in the bank account at the end of the month, the more “free” money they will earn. We’ve only just started this so have not yet attempted to point out the delights of compounding interest to them.  But they are excited to build up their money, particularly as they are both saving for a Nintendo DS. They quickly grasped that the interest would get them there faster.

When we introduced this new allowance, we also talked with the boys about the following guidelines/opportunities:

  • Full control – we’re giving them each $6.00 per week and it’s their money. They can spend all of it, save some, give some to charity, whatever they like. (We do reserve the right to have veto power.  For example, they can’t buy video games that are out of their age range. If they buy sports equipment, they will need the appropriate safety gear to use with it.)
  • Responsibilities – they are now expected to cover the cost of all drinks outside the home, all snacks, purchase of video games and toys, any spending in arcades and replacement of lost clothes/shoes.  This will teach them to make trade-offs in their decisions about how and when to spend money.  Do they really want that snack or should they keep saving the money to buy what they really want.  (We will provide drinks and snacks when we are out on family outings that would normally encompass these items, eg. ice cream while on vacation at the beach.  We will also provide water and bring our own snacks as usual – if they want more, they can pay for them.  We’re not expecting them to get dehydrated or go hungry!)
  • Opportunities to earn extra money – we now have a Help Wanted sign in the kitchen and the boys can earn extra money for household work beyond what they are expected to do as members of our family.

One problem we had in switching over to the new system is that both boys had a few hundred dollars in their Save jar. We didn’t want to just hand that over. So we made our last unilateral decision about their allowance and said that we would put it in their college savings accounts. As they didn’t feel any real ownership of this money, they were OK with this.

An equally important element of our new approach is tracking spending and earning.  More on that to come in another post.

If you have a Spend-Save-Share approach to allowances, ask your children how much they get each week and share their response in the comments. Any suggestions on things to watch out for as we try this new approach?

3 Responses to The 5% Difference To Kids Allowances That Delivers Powerful Lessons

  1. Suzanne,

    Thank you for the nice mention and for the thought provoking post. You make some excellent points and it’s always great to hear real, first-hand experiences.

    We have a spend/save/give approach (with Bank of Dad style interest rates) with out kids, and I’m pretty happy with how it’s turned out. Our stated policy is that we roll the balance of their virtual FamZoo Save account into their real world savings account when they graduate from high school. (We happen to transition our kids to real world accounts the summer before college, but pick whatever timing makes sense for your family.) When that transition day comes, I can say from experience with 2 of our kids so far that it is highly appreciated. My hope is they remember that wind-fall feeling and choose to replicate it later in life by taking advantage of savings/investment plans that automatically deduct from their paycheck. “Forgetting” about that deducted amount and learning to live without it is exactly what makes the auto-save/invest schemes so incredibly effective. I remind them frequently that my aggressive leveraging of the Employee Stock Purchase Plan at Oracle still fuels much of my seed capital needs today at (thanks Larry) and allows me the freedom to pursue my mission and passions according to my own terms (rather than some external VC terms – big, big difference).

    On the Giving front, we make a charitable contribution together every time the balance in one of their virtual Giving accounts reaches $50. This approach gives us a good consistent touch-point around charitable giving and the process of philanthropy. At minimum, it’s led to a lot of valuable conversations so far that we would not have otherwise had (at least not regularly). Ideally, it will turn into a life-long habit early on – one that I didn’t really pick up in earnest until my 40s.

    BTW, whether or not you choose to have the Save/Give accounts, I do like the idea of having aggressive interest on the Spend account because it encourages that all-important concept of delayed gratification and teaches the power of compounding.


    P.S. One of my favorite destinations for charitable giving with our kids is – here’s a related post that explains why:

  2. Karen L says:

    just popped in following your link from HappiestMom. Great Ideas! I will definitely be trying most of this once my oldest is ready for an allowance – soon, he just turned four.

  3. […] and I created a whole new allowance system for our two boys – now age 10 and 7 – about a year ago. The centerpiece of the new allowance approach was […]

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