Now that you’ve decided what you’re going to use to figure out the allowance you’re paying to your kids – and how much you’re going to give them – you’re faced with the question of what they should do with it.
After all, you don’t want to just fork over a bunch of money for them to do whatever they want. I’m pretty sure you don’t want them just buying themselves a new impulse purchase every day (helloooooo candy from the checkout). Instead, you want to use this allowance to teach them important lessons in wise spending, saving, and sharing by giving generously.
But how much should go to each category? And how can you best teach your kids about the value of each category? Here’s a few ideas.
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How Much For Each Category?
An easy rule of thumb is to divide each allowance payment into thirds – one third for saving, one third for spending, and one third for giving. I’d suggest you want to set a standard for what the saving jar can be used for, so your child doesn’t just “save” for two weeks and get some extra candy instead of the larger purchase you want them to save for. You might say that the saving jar can only be used once a month, or for purchases over $100, or some other standard.
Another method is 50/25/25 – fifty percent spending, 25% saving, and 25% giving. You might want to use this method if your child is expected to use their spending money on more than just incidentals – like if you expect them to purchase their clothes and shoes with their own spending money.
Honestly there’s no right or wrong answer here. The important thing is consistency, so your child knows what to expect and how much should go in each jar. With older kids, you’ll also want to start a conversation on how much of their “spending” should go to needs vs. wants, and the different types of goals adults save for (emergency funds, new cars, to prepare them for adulthood when no one divides your money into neat categories for you.
When They’re Young, Make It Tangible
When you have a young child – say, around ten or younger – the concept of invisible, invisible, and virtual money can be hard to grasp. That’s why people recommend piggy banks and money jars for young kids. It allows them to see their money, take it to the store, and watch it grow as more money gets added into their bank/jar..
You can go simple, and get a few mason jars to keep the money in. Heck, decorating the mason jars can be a fun project to do together! I have a bunch around the house from my summer strawberry jam canning adventures, so this is the route I’m going with the little guy.
Or you can pick up one of these cool “tri jars”, with a divider into spending, saving, and sharing. It makes teaching kids this important money lesson even easier!
Tangible, in this case, doesn’t just refer to the collection of money. It also includes giving thought to what you want the child to save for, and what you’re going to buy with the giving jar.
In terms of the money for saving, what you’ll want it to be used for depends on the age of your child. When they’re young, they may need your help to think of – and remember – a larger item that they want to save up for. You’ll need to remind them, once they’re eyeing the candy at the Target checkout line, that they said they wanted to save up for that expensive P.J. Masks control tower. You might need to help them with how much their goal is, what they want to buy, and to count their money to see how close (or not) they are to reaching their goal.
Tangible giving works well for young kids too. They can be so proud of themselves when they take their giving jar to the store, purchase some food donations for a hungry family, and bring their food to the local community services organization. Or when they use the money in their jar to buy a toy for a sick kid, and drop it off at the hospital, they can feel happy about bringing happiness to sick kids.
Heck, if your child is fond of a particular animal, they can donate to the World Wildlife Fund and get a really cool postcard or stuffed animal in exchange. Just check out all their species adoption options!
When They’re Older, Make It Automated
As your kids get older, you’re going to want to teach them to manage their virtual money. This means you’re going to want to go beyond the jar and automate their spending account, savings/investments, and giving.
Why automation? Because learning to “set it and forget it” is a very important concept to understand as an adult. After all, if you need to log into your account and manually choose to invest, or save, or give every single month, you’re much more likely to forget than if you have it set on autopilot. It’s much easier to just take no action – so automation is usually the way to go.
We also live in a virtual money society. I know that I never keep cash on me anymore – not since companies started accepting credit and debit card payments for purchases of all amounts. I’m not alone – about thirty percent of people make no cash purchases each week. The younger you are, the more likely this is to be the case.
Learning to manage virtual money, and to treat it with the same respect and forethought as cash money, is an important life skill you’ll want your kids to master before they go off into adulthood.
The giving can go virtual now too, with your child making an online donation to a cause they care about. Maybe a budding artist wants to give to an organization bringing art to underserve communities, or a future teacher wants to contribute supplies to a classroom. Now that they’re older, they can better grasp how virtual donations to important causes really work.
There are a few ways you can automate these kinds of accounts, which I’ll get into in the next article in this series. For now, if your kids are over ten, just remember that it’s time to start thinking of switching from cash to a more virtual account.
Parental Match – Bank Of Mom And Dad
For the “savings” jar, I’d like you to consider using the bank of mom and dad to help your child better understand the concept of compound interest.
When I was a kid – long, long ago when dinosaurs roamed the earth – the concept of putting your money aside and getting a decent amount of interest was actually a thing. Today interest rates on kids account are around one percent if you’re using an online account. They’re a fraction of a percent if you’re at a big bank, or your local brick and mortar. Getting a penny of interest a month on hundreds of dollars doesn’t really teach your kids the value of saving and compound interest.
So how can you help them learn this? By using a parental match from the bank of mom and dad. Maybe you offer to match every dollar they save above and beyond their standard savings amount. Or perhaps at the end of every month, you pay a high amount of interest (10%, 25%, etc.) on the money they have left in their “savings” jar.
With older kids, you can offer to match the money they contribute from their job into a Roth IRA, or bump up their savings for a car by 50% of your own money. Whate3ver you choose, think about how you can use the parental bank to better teach them about the value of savings than the lessons they’ll get from that extra penny in their accounts.
What Do You Do?
Do you pay your kids in cash, or virtual accounts? Do you have standards for spend/save/give, or do you leave it more up to your kids? And have you found any products particularly helpful? I’d love to know in the comments.
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