Monday, February 9, 2015

Allowance, Chores & Contributing

A lot has been written on the controversial subjects of allowance for children, instilling a healthy understanding of money and saving, balancing the merits of paying for chores and paying for entrepreneurship, and contributing to charities and the household. For us, the way we manage money with our kids is framed by how we managed money before we had kids.

Two salaries:

When Aviva and I started living together we had to figure out a good way to manage our money and expenses. Knowing that many relationship problems develop around money, we wanted to make sure we had a sustainable system that we would be happy with. At the time I was earning about twice as much as she was. If we split our expenses evenly, then she would struggle to afford her share of the expenses and I might feel restricted by her financial limits. If we combined our income then I might feel resentful of carrying more than my share of the financial burden, and she might feel insecure about carrying less than her share. Note that at the time we were both working full time and household responsibilities were few and divided evenly.

What we agreed on is to share the expenses proportionately to our earnings. This would mean that since I made about twice what she made, or two thirds of our combined income, then I was responsible for about two thirds of the expenses. This compromise means that our time is valued equally. As our individual earnings changed, so did the proportion we each contributed. All our extra earnings would be kept in our own individual accounts.

People often laughed at our system and thought it was overly complicated, separate, or distrustful and based on the possibility of us splitting up. However, it worked very well for us. We each had our own individual checking and saving accounts as well as a joint checking account that we used to pay our bills and a joint saving account for any money that came back to us (i.e. tax returns, etc.). With a worksheet we were able to be as detailed or generalized as we were comfortable with when it came to determining how much we needed to contribute to the joint checking account. Having individual accounts gave us some financial autonomy and freedom to spend our own money however we wanted. We both had veto power over any joint expenses.

One salary:

When Aviva got pregnant things changed. We both wanted to stay home with our child, but financially it only made sense for her to stay home. If she wasn't earning any income, I could just pay for 100% of the expenses, but then she would not have any money of her own to spend and save. Since she was still contributing her time and effort, even though she wasn't earning income, we needed a way to divide our income fairly. We decided we would use her peak proportionate earnings, which was 38% of our combined net income, and I would give her that amount of my earnings.

Now every time I got paid, I gave her 38% of my net pay, and we continued to cover our expenses like we always had, though things were obviously more tight with only one income.

Allowance & Chores:

When our kids were old enough to start managing money, which we found to be about 5 years old, we used a similar system to give them an allowance. What we explained to them was that we all contribute to our household, and we all share our wealth proportionately. We are a family and a team! Allowance was something they received for contributing their efforts to the household. These efforts started with things like cleaning up after themselves and straightening up their room and later evolved to things like doing dishes, taking out garbage, doing laundry and folding clothes, etc. Note that they were not paid for doing their chores. They had to share in the household responsibilities and would subsequently share in the wealth.

Allowance should not be used to pay for chores, which includes anything that would otherwise be done routinely by parents. Instilling a work ethic and an entrepreneurial spirit are great, but save that for work outside the home. Paying for chores divides the family unit with a capitalist mind set, which is the antithesis of teamwork. Once a child is accustomed to paying for chores, everything becomes open for financial negotiation. If a parent doesn't get paid for doing chores around the house, why should their child? Paying a child for work that a parent would otherwise do also breeds entitlement, as it literally teaches them that they are entitled to special treatment. Sometimes the reward for pitching in and doing a good job is simply a thank you, and if that's not good enough, then maybe they need to be reminded of all the things that are done for them.

We decided that their allowance would be 0.1% of our combined net income multiplied by their age. As they got older and they contributed more effort to the household, their share would also increase. When they turned 5 years old we deposited their retroactive allowance into their saving accounts. Afterwards, they would get paid when I got paid, but they couldn't just keep it all.

Saving & Contributing:

We wanted to make sure that our kids learned how to manage their money, which included saving and understanding the cost of things, including household expenses. We also wanted them to understand and get used to the fact that household expenses account for a significant portion of income.

Each time they received their allowance they would have to divide it up. Half of their allowance went right back into household expenses, into what we called the kitty. The remaining half was divided evenly into saving and spending.

Note that their savings was not money they would save for weeks in order to buy a toy or something trivial. That's not the way life is. Those types of expenses are what their spending money was for. Their savings was for long term savings, like education, or maybe even their retirement. This is what we, as adults, have to do, and it is never too early for them to acclimate to these realities.

In order to use allowance as a tool to teach kids about the value of money, they have to pay for their own stuff. Parents have to figure out, based on how much spending money their children have, how much spending they are responsible for. That spending money should not be all discretionary, to be used on candy, video games, etc. Children can pay for gifts for other family members, optional clothing, entertainment, or the difference between excessively expensive clothes and more reasonably priced clothes.

Many families also want to include charity in their kids financial education. We managed this similarly to the way we managed the rest of our finances, as a team. Periodically throughout the year we get together and make donations to various charities that we all agree on.

Any money they receive as gifts goes to their spending money unless they choose to add it to their savings bank, which they often do, depending on how much they have to spend.

Ron Lieber, "Your Money" columnist for The New York Times and the author of The Opposite of Spoiled: Raising Kids Who are Grounded, Generous, and Smart About Money, discusses shaping kids' attitudes and values toward money, including earnings, savings and giving some of it away.

No comments:

Post a Comment

*** Anonynomous comments will not be published. ***

Instead use the "Name/URL" option.

Popular Posts