Morgan Ulmer, CFP®
Certified Financial Planner® professional
Morgan joined the team in February, 2019 with 8 years of financial planning and financial literacy training under her belt. She is as comfortable working on complex financial planning engagements as she is helping young adults understand budgeting and debt management.
There’s no two way about it – kids are expensive. A common statistic found on both sides of the border is that a child will cost $250,000 over 18 years to raise. That works out to $1150 per month.
How much your kids will cost you
If you want a more personalized estimate, check out the excellent “Cost of Raising a Child Calculator” from The Measure of a Plan. Yikes! It looks like our youngest is still going cost us $206,000 even though he’s already six.
While the cost of raising kids is highly variable depending on your lifestyle and location, the expenses under any circumstances will add up.
What can you do about it?
Luckily, there is a powerful tool that allows you to gain control over some of your child-related expenses, while also teaching lifelong money management skills to your darling offspring.
If you haven’t guessed, that tool is an allowance. Our clients often ask about allowances for their children, namely how much is the “right” amount. Here’s a good rule of thumb if you are looking for a quick answer: $1 per year of age per week.
But like so many topics in personal finance, it’s better to go beyond rules of thumb. So let’s do that here.
Creating an allowance system (starter tool below)
Step 1: Determine which costs are your child’s responsibility
The first question to ask is not “how much”, but “what expenses will your child be responsible for”? A child who pays only for the toys they want will receive a different amount than the child responsible for clothing, entertainment and school lunches. The age of your child will be a big factor.
Step 2: Establish the categories that the allowance will be divided into
You’ll often read about splitting a child’s allowance into three categories – spending, saving and donating. Don’t forget a fourth – investing. It’s important that kids think of themselves as investors right off the bat, no deep understanding required! Our youngest knows is that his investing dollars are the ones that he cannot touch, and are the same ones that will make him rich. Explanations can build from there as your child gets older.
If you’re wondering the difference between spending and saving: spending money is flexible and can even be used impulsively. Savings is meant for a longer-term goal such as a more expensive toy or video-game system. Kids quickly realize that if they have a bigger goal in mind, they can reach it more quickly by redirecting their spending money to their savings.
By the way, we like these segmented piggy banks, but four jars or containers will do just fine!
Step 3: Calculate an amount for the allowance
Now you can intelligently decide how much allowance to give your child, as well as how the allowance will be divided. Don’t overthink it! Your system can be tweaked as you go along.
Step 4: Decide if the allowance will be tied to chores
Most parenting experts agree that allowance should not be tied to chores. Chores should instead be an expectation of your child being a citizen of the household. Eventually they will be citizens of the world, and we want them to naturally pitch in without the need for reward. With this said, chore-based allowances are not uncommon. Consider using a balanced approach where certain chores are simply expected, while some special chores of the parents’ choice are paid. Cleaning the family vehicle comes to mind!
Whatever your philosophy, here is a handy list of age-appropriate chores.
Step 5: Make a plan for extra funds
Your kids are bound to come across extra income, whether from birthday money, odd jobs or babysitting. Having a plan in place ahead of time lowers the likelihood of these bonus funds getting frittered away (this is true for adults as well – how will you use your tax return by the way?). You can follow the regular allowance structure as a guide, and modify as needed.
A real world example:
As context, our 14 year old receives an allowance of $15/week. Of this:
- $10 goes to spending
- $2 goes to saving
- $2 to investing and
- $1 to donating
If she wasn’t naturally a good saver, we’d likely bump her spending down and her saving up.
Here’s what we pay for:
- her cell phone
- all extracurricular fees, supplies and gear
- basic clothes, outerwear and shoes,
Here’s what she pays for:
- “Extra” clothes and shoes
- Birthday gifts for friends
- Entertainment (movies, bowling)
- General spending (books, iTunes, snacks)
From any babysitting money she earns, 10% first goes to investing and the remainder is split 50/50 between spending and saving. After many years of us quietly investing her grandparents’ birthday money into her RESP, she caught on. She now exercises her right to these funds and she uses them as she sees fit.
The 10 and 6 year olds are simpler: $5/week: $2 spending, $1 saving, $1 donating, $1 investing. Seeing that in writing makes me realize that the 10 year old is due for a raise.
We’ve created a guide called “Your Family’s Allowance Plan” that will walk you through the five steps of establishing an allowance system. It also has templates for goal-setting appropriate for different aged kids.
Make a date with your family and get started. Don’t worry about getting it perfect! You can always make adjustments.
Here’s the key: once you’ve started your child on an allowance, you have to stop becoming the bank of mom and/or dad. Not only is it better for your finances, but more importantly it will teach your child about trade-offs and delayed gratification. If they can’t afford something because they haven’t saved enough yet, or because they blew their money elsewhere, don’t rescue them. It can be hard, but it is far best for kids to learn these lessons early while it’s still safe to fail.
This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.