Part 3: Setting Expectations
Posted by Gail | Filed under Kids & Money
One of the most difficult parts of allowance-giving for most parents is establishing expectations for how that allowance will be managed. Does a child have the right to spend all her allowance on anything she wants every week? Actually, while it’s her money, the liberty to spend at will does nothing to teach good money management. In fact, it isn’t a liberty afforded to us as adults. Since we are required to spend a certain amount of our hard-earned money in fixed expenses, regardless of what we want to buy ourselves — we have to keep a roof over our head and our children fed — allowing kids to do as they will with their entire allowance isn’t a true representation of money management in the real world.
In learning how to manage money, children need to see that there are a variety of purposes for money, not just the immediate gratification of spending it. Spending is a part of the equation, but so too is saving and sharing with others less fortunate.
Look at an allowance as having three components: (1) the part to be saved, (2) the part to be shared, and (3) the part to be spent. This third part of the allowance equation can itself be broken down into two parts: the spending kids want to be able to do on a whim (their mad money), and the spending they intend to do based on specific expenses and expressly stated goals (their planned spending). Spending on a whim comes naturally to most people. Saving, sharing and planned spending are all ideas that have to be introduced, practiced and reinforced.
One way to clearly differentiate between the different purposes for money is to set up money holders for each purpose. Believe it or not, this is where the idea for the Magic Jars came from. In my book, The Money Tree Myth, I recommended that parents use four containers, clearly labeled: Savings, Sharing, Mad Money, Planned Spending. When it came time to do TDDUP, those containers turned into jars, and the rest is history.
The reason the jars work for children (and apparently for adults too) is that they make the finite nature of money visual. There is only so much. If you spend it one one thing, you won’t have it to spend on another. When the money is gone, you have to stop spending. (As adults, we’ve lost touch with the idea that money is finite because we’ve fallen into the trap of using credit to fill the gap. Living on the Magic Jars puts people back into touch with the fact that money is a limited resource and you have to plan if you want to get to the end of the month before you get to the end of the money.)
The rule of thumb for saving is that you should save ten percent of your income. If your child gets five dollars a week, the first expectation to set is that 50¢ needs to be put in the Savings container. The rule of thumb for sharing is that you should put aside five to ten percent for charity, so if this is something that is important in your household then into the Sharing container should go 25 to 50¢.
Now comes the hard part. What percentage of the remaining money should be planned spending versus mad money? That depends on whether your child is expected to pay specific costs for herself, and what long-term spending goals she has.
Let’s say, for example, that as part of her allowance you provide your child with enough money to pay for her bus fare to and from school each week. That money should be set aside in the Planned Spending container to be used each day as needed. If you expect your child to buy gifts for special occasions from her allowance. together, you’ll have to figure out how many gifts are bought each year, and how much of her allowance needs to be set aside each week so the money will be there when the special occasions roll around. (You may also have to set up extra jars so your child can set the money aside visually.)
Your child might also have a special purchase in mind, like a new Ip-Od. Help her determine how much she needs to put aside each week so that dream can become a reality. And help her come up with a system for monitoring her progress so she stays motivated.
The rest of the money is mad money. She can spend it or she can put it towards her Planned Spending goal (the Ip-Od). She can do anything she wants with it!
Alex is about to head off on a European trip with her school chums. I paid for the trip, she had to come up with the spending money. We were talking about how much she had last night, and she was commenting on how her friends are scrambling to find money. “But they’ve been shopping,” she said. “Every time I wanted to buy something, I thought about the trip and then thought how badly I wanted the thing or the money for the trip.” See, it works. Finite resource. Infinate spending opportunities. And the opportunity to figure out what you really want!
Next Week: The Strings Attached
March 5, 2009 at 6:59 am
I guess I’ve taken the savings part out of my kids hands by withholding $1/week of their allowance and depositing it directly into their bank accounts at the beginning of the month (rounded up to $10 for now). My daughter is saving to pay for half of a Wii that she wants for her birthday. Usually a raging spender, she’s doing so well I can’t believe it. Mind you, she doesn’t go grocery shopping with me anymore either, because I think that even at 10 years old she realizes her spending-traps…garbage from the grocery store!
I do have my kids pay for part of their friends birthday gifts. I cough up $15-$20, depending on how well I know the child to be honest, and if they pick out something that costs more then they cover the rest.
My kids are doing so much better with getting and saving money than I was, but I do want to figure out a wider level of things, like clothing and back-to-school supply costs so they can really learn the Planned Spending thing (and not i-Pod/Wii/gotta have it kinda things).
Looking forward to Strings Attached Gail, thank you so much for teaching us in baby steps. Yesterday’s RRSP stuff I’ve got saved to go back to when I can wrap my head around it. Set up a self-directed RRSP and haven’t ‘directed’ it anywhere in the year I’ve had it cause I freeze when I look at all the options. But that’s another thread! :-O
March 5, 2009 at 8:55 am
With regard to back to school shopping I gave both my kids a $150 budget but I made it clear to them that that was all there was. My daughter went through all her stuff and really looked at needs vs wants. She had me wash her backpack and it still looks good almost 2.5 years later. She had money left over which she put into her savings. My son on the other hand is hard on his stuff and never went through the exercise of what he needed as opposed to wanted. He lost things and never went to the Lost and Found to find them…so when it came to back to school shopping he had to take money from his savings to cover the additional costs. He is looking after things better now and has even told me that he doesn’t “need” a new backpack next year.
Baby steps!
March 5, 2009 at 9:11 am
I’m saving all these tips so when my daughter is old enough to start her on allowance, I have something to go back to. She’s turning 4 soon so I’m sure that day will come sooner rather than later. I’m so excited actually.
March 5, 2009 at 10:14 am
If kids can learn this at an early age, it’ll serve them well.
I have to bite my tongue really hard when I hear about friend’s hours at work being cut, salaries being reduced, difficulties making ends meet… and then helping them move a new bed, a new flat screen tv, eating out/ordering several times a week…
March 5, 2009 at 10:43 am
Colleen:
I completely disagree with your assessment of the situation!
These are NOT baby steps! These are age-appropriate understanding of the world. Nothing baby about it. You provided both children with good material to learn an important lesson and both gain tremendous insight. You should be going around beaming!
March 5, 2009 at 10:49 am
Colleen, I have to agree with Marie. Sounds like you are doing awesome teaching your children responsibility and to not waste. Good on ya girlfriend!
I like the explaination of sorting the savings into 4 categories. I fonud a piggy bank online that has 4 slots/sections designed for this type of savings. BUT it cost around $25. That’s $25 we could be saving…
March 5, 2009 at 10:52 am
Plus a piggy bank doesn’t pay interest!
March 5, 2009 at 12:19 pm
Colleen; I did the exact same thing as you! I gave them a budget for school supplies and told them that any remainder could be saved at their descretion. My oldest managed to recycle many of his supplies even though they weren’t shiny and fresh, they were servicable. He also checked the flyers to see who had the best prices on what he needed to maximize his buying power! The younger one had more problems (but I have to give him credit, he is only 7).
As for setting expectations, the allowance idea is still fairly new to them, and I haven’t structured it rigidly. Their “sharing” portion tends to happen with their belongings. Every weekend I put a box by their room doors and ask them to donate any toys/clothes that are still good but they don’t use/like anymore. (Because we often get things at the charity that we mostly donate to, they are aware of what these donations mean to young families, and the organizations out there that help families in need.)
March 5, 2009 at 12:53 pm
Thanks for the comments….I really am proud of both of them and it has taken a tremendous amount of stress off of me as they both have their own money and don’t ask for things all the time.
On another note my daughter got her allowance and wanted to use it to go see the new Jonus Brother movie…but then she got her Scholastic book order form and wanted to order a book as well. Well she did her math and knew it had to be one or the other so she was saving for something else and decided the book was what she really wanted. She said to me” Mum I really hate spending my own money” Good Lesson learned!
March 5, 2009 at 2:00 pm
What great information, thank you Gail!
We started an allowance routine last week, but with only 2 jars.
Both children (aged 8 and 12) receieve $5.00/week allowance.
To teach them good behaviour and respect (these have been lacking recently), we have THEM take a monetary amount out of the jar as their punishment…eg. 25 cents for arguing, 50 cents for lieing, etc. etc. We originally had larger amounts, but realized quite quickly that they were not practical. The key here is that THEY have to take the punishment money out of their allowance jar THEMSELVES, that way they “see” it, rather than just “hear” it.
Of the $5.00/week they receive, $2.50 of it, HALF, goes into a separate savings jar…they put this money into their bank account every month. Unbeknownst to them, the “punishment money” they have removed from their weekly allowance goes into their bank account also.
We just purchased a Wii system last week, the kids (and their Dad, lol) wanted it really badly. We already have 2 game systems, so the deal was they paid for half, we paid for half. Our 12 year old daughter babysits so she actually makes money, and I assigned our 8 year old son extra chores, etc. to raise his amount. It took over 4 months, but they did it! And you know what? They appreciate it so much more when it’s “earned” by them. They did wonderful!
We created this new system because after they got the Wii, they kind of lost motivation because they had what they wanted, why bother saving more money?
It’s only been a couple of weeks, but so far this system is working out beautifully! It’s teaching them money management and respect/good behaviour at the same time.
This may seem strict to you, but it’s working.
I grew up in a very small town, in farm country, and we had chores and work to do everyday. My parents could not have done a better job with us…their strictness definately paid off in our benefit. Thank You Mom & Dad.
By the way…I talked to my children’s prinicipal about this plan yesterday in passing. She said she wished more parents were like us, and I was a good Mom! Score 1 for Mom, YAY, LOL!
March 5, 2009 at 2:35 pm
Lorri, I don’t think your plan is strict. I too place a few chores/behaviour tied to our daughter’s allowance. She is developmentally delayed so they are simple things but the ultimate lesson I believe is that no one out there in the real world is going to give you money for nothing. It will be interesting to hear what Gail has to say next week when she writes on “The Strings Attached”.
March 5, 2009 at 3:38 pm
@Lorri, where did you find a Wii that was $160?? If your kids get approx. $20/month, and half has to be saved, then in the over 4 months they would’ve each only contributed $40 each right? I’m asking because my daughter’s saving her $8/week (their age minus the $1) to pay for half of a Wii system, and we’re estimating it’ll be at least $200-$250 to buy the system, never mind games. If you found one for less than $200, I’d be interested in checking it out.
The losing $$ as punishment thing I dunno about…sounds like the old ’swear jar’ system to me that usually backfires in a huge way, but hey, if it works for you then all the power to ya…I’d be concerned when the kids are old enough to make their own money and then can tell each other off in spades because the parents don’t control the income anymore!
March 5, 2009 at 4:05 pm
As an allowance deprived child all that I can say to the parents out there is that if you really want the best for your children you will give them an allowance. It is your choice of how much and if you want to attach a work ethic to the money or not, but your kids are never too young to start learning to handle money and be responsible for it and themselves.
Nothing you teach children is guaranteed to stick but having an allowance will give them experience with money and may help them form the good habits of financial responsibility that they will need in later life. They may end up developing bad habits with their allowance but they will learn something from that as well. Having no allowance pretty much guarantees no habits, no lessons and no experience.
My husband is Scottish/Ukrainian by descent. He always got an allowance. His Scottish genes can be very frugal and stash money away but the Ukrainian genes love to have a good time and they always find the hiding place. And apparently love not only makes you blind but stupid too. With little to no effort I managed to completely corrupt him and lead him into temptation and debt.
All of OUR money problems began in my childhood and of course you know who gets the blame. If it’s not one thing it’s the Mother. Well, to be fair, Papa and my kindergarten teacher, Miss Edwards contributed to my delinquency as well.
They say you learn what you live but that is only true if your parents don’t set you up for failure by being loving human beings and making mistakes.
Before Mom was even born my talented and generous Grandpapa made and lost 3 fortunes – gambling or giving it all away. After her birth he happily did it over and over again until Mom took over the family business and finances at the age of 16.
For some odd reason she became a rather controlling control freak and never ever trusted anyone with so much as a single Swiss franc. Mom had enormous respect for money, despised debt and was talented and generous to a fault but she had to have the final say. “An allowance? Don’t be silly. You have everything you need and just ask me for what you want and first I will say ‘No’ but then I will get it for you. In fact you should have two of everything and don’t worry about it – I will find the money by not eating for a month.”
Mom knew all about the true cost of debt and despair, worked 25 hours a day, , never owed a dime, turned an immigrant’s income into a middle-middle class lifestyle and yet never thought to teach her children how to handle money. She never gave us a chance to learn by doing and over protected us from making our own mistakes. A stunning lack of judgement for such an intelligent woman. Oh, well. She loved us to debt.
Papa was the last male born into his very old and rich family and was spoiled senseless by dozens of kissy, huggy, relatives. Like the Queen he never paid for anything directly. Not surprisingly he had a very easy come easy go attitude about money. When and if he ever thought about it at all.
He suffered immensely as a soldier and lost everyone and everything during and immediately after the war finally escaping with only the clothes on his back, a watch on his wrist and a leather wallet (with no money in it) in his pocket. Fortunately one of the first people he met as a refugee was my Grandpapa who rescued him from starvation and then fixed everything else by introducing him to my Mom.
It was love at first sight for them and Papa of course pawned his watch to buy roses for Mom on their first date. She immediately stomped into the pawn shop, bought the watch back and took him in hand – where he happily stayed for the next 45 years. Papa was an engineer, scientist, astronomer and mathematician but despite actually working for NASA the knack of handling money and avoiding debt really WAS rocket science to him. And yet he always told us was that the way to solve any problem was to do the math – or ask your mother.
Miss Edwards was just an all-round bad example. She failed to teach us five year olds the importance of budgeting and saving for a rainy day and led us to believe that what ever you needed would always be available.
Bad bad teacher. She let us use all the plasticene the very first week to make the animals for our Noah’s ark and then borrowed more from Mrs. Goudie’s grade one class in order to finish the elephants. And even though she knew Michael Morgan was eating the paste she just kept giving it to him as if the supply cupboard had an endless supply and no one had to pay for it. Sadly my own poor judgement of boyfriends and the development of bad borrowing habits started at this time as I used to give Michael Morgan my paste and then borrowed more paste (at a ridiculously high interest rate of 10 raisins per day –we could only count to 10 at the time) to try and buy his love. In grade one I found out that all along he had been faithlessly giving MY paste to Brenda Wylie. Little stuck up cow.
When I was ten I decided to run away to join the circus to be the beautiful lady with plumes in her hair who rode on top of the elephants. I told Mom and Papa and they thought it was a good idea but told me that I could only join if I owned my own elephant. Bummer.
Papa figured out that an elephant cost about $2 million dollars which I would have to earn because his salary would not stretch that far. In a moment of insanity completely contrary to their life’s work of spoiling us rotten they suggested that work – chores – would get me what I wanted. But the concept just didn’t catch on. Why would it? Up until that point – and pretty much until they passed away – all I had to do was hold out my sticky hand and money would miraculously appear. I prayed for an elephant every night until I was eleven but then discovered boys.
When I first left home I was constantly up a creek without a paddle or a clue. Luckily my parents always bailed me out and kept me financially afloat.
When I started living in sin with the future Hubster we thought we were so grown up but were actually entering into an extended second childhood.
We immediately combined all our income to pay the bills believing that this was the responsible thing to do. Unfortunately we also immediately started taking an allowance. The amount was supposedly based on the amount of money left over after the bills were paid. If it was $100 we each got $50. If it was $400 we each got $200. This was private and personal money and neither the party of the first part nor the party of the second part had the right to question its use or throw temper tantrums about it.
Well as you might expect since we had no actual budget the allowance never quite stretched to cover the demand placed on it so the overruns went straight onto the credit cards. Eventually the bills became so outrageous that there was no pretend money left over for an allowance at all. But we just kept playing house.
It took us over thirty-five years, immeasurable stress and shockingly measurable debt to finally learn the lessons that would have been so much easier to learn in our youth when buying the next comic book was the be all and end all of our needs, wants and future plans.
I love having someone to blame but you are actually only a child for a few years so the “I can’t help it I’m too young to know any better” excuse doesn’t really hold up. When you are an adult your brain does not stop learning unless you put it into storage.
Today as we enter into our third childhood we finally know how to manage our money – budget, live within our means, save for the future and our wants and say no to everyone including ourselves and our egos.
AND we both have an allowance again which gives us something personal and private. It is a fixed expense. Unless we need it to pay a bill in cash.
A dollar for each year. I’m finally rich and got my elephant – through The Elephant Sanctuary in Hohenwald, Tennessee.
March 5, 2009 at 5:00 pm
Diane,
THANK YOU…I appreciate it. And here I thought I was going to be yelled at for being too strict, lol.
I’m looking forward to Gail’s article next week too. I’m a new fan of hers (Thank You friend and neighbour Colleen, lol) and I’ve already learned so much from her.
I totally agree with your opinion that there’s no money for free.
I used to work at a group home for developementally delayed adults, they all had cerebral palsy.
It was “their” home, and we pushed that on them, basically forcing independance, which they REALLY appreciated.
Every week, we sat down with the weekly grocery budget and went through what they could afford to buy vs. what they wanted to buy.
I was truly inspired by their practicality in it all…they taught me more than I ever taught them.
It’s amazing where you learn life’s little lessons!
March 5, 2009 at 5:07 pm
Michelle,
LOL, Nooooooooooo, I didn’t find a Wii for $160 (I wish!)
The $160 was HALF the amount of the Wii system, with the Wii sports package.
I don’t think I was very clear, and I apologize.
We just started the $5/week allowance BECAUSE my children were losing their motivation to save after we got the Wii system.
The majority of the money they saved for the Wii was from my daughter babysitting for the neighbourhood. My son helped out where he could.
My daughter does make her own money, and quite a bit of it, so you could be right about the system backfiring.
However, she is cheap like me (I love it, lol) and she doesn’t like losing money at all, no matter where it comes out of.
I hope that your system of saving for your daughter works.
March 5, 2009 at 5:29 pm
Michelle,
You asked where to get a Wii for $160. Is there a craigslist in your area? Many people buy game systems then realize they can’t afford it or they don’t use it.
I checked craigslist for my city, and there are several Wii’s (plus games) listed for less than $220 that are only a few months old. You can verify it works before you buy it, and most people still have the receipt. Plus, usually they will come with at least one game and an extra controller.
March 5, 2009 at 6:54 pm
Maureen, I’m glad to hear you got your elephant after all! ; )
March 5, 2009 at 9:30 pm
Lorri, I had a similar system growing up, we called it the “allowance chart”. If we misbehaved, we lost 25 or 50 cents out of our 5 dollars.
Unfortunately, it wound up being completely useless and actually caused us worse problems with money… I think the most I ever got by the end of the week was 50 cents (it was more often 25 cents), and that wasn’t enough to do anything with. Pretty hard to split that into saving, planned spending, charity, etc. It was usually spent right away as a “thank good ness I FINALLY got some allowance” sort of thing.
While I appreciate my mum’s intentions, I don’t intend to reproduce the allowance chart system for my kids.
March 6, 2009 at 1:36 am
[...] Vaz Oxlade talks about Setting Expectations for kids’ allowances, which is a topic near and dear to my heart. Do you control how your [...]