Question: Is it a good idea to give our children cash allowance? How much should we give them? – Workshop participant
Answer: These are the questions I always get. There’s a school of thought that says that children should earn their cash allowance by doing chores at home. This is good in the sense that it teaches children the relationship between work and pay. There are a lot of “jobs” that your children can do especially during summer that can make them earn a few bucks. However, be careful not to overdo it because you might give the wrong signal to their young minds that they only do things for money. There are things that they should do because they are members of a household. And bear in mind, never pay your children for doing things that involve their personal hygiene!
In my case, I grew up on weekly allowance that started as early as kindergarten. Looking back I now realize that it was the best training ground for me not only on budgeting but also on wealth accumulation.
Now, to answer your question about the amount, it’s really to each his own, but here are the factors you should consider.
First, what would be included in the allowance? Will they still bring baon to school or will they get their meal expense from their cash allowance? How much is an average lunch and snack in their canteen? Will they take care of their transportation expense? Other expenses like school supplies, cellphone load, etc.?
The next thing to consider is how much your family can afford. Do not be swayed by your children’s drama about having the lowest allowance in his class. Always stand your ground on what your family can afford and believe in.
Another matter to take into account is your children’s ability to control spending. Are they ready to receive allowance on a weekly basis? If they show weakness in control, all the more you should train them to budget. Make them bring only the equivalent daily amount of their weekly allowance. (i.e. weekly allowance divided by 5). If they fail to exercise control and finish their weekly allowance before the end of the week, DO NOT give them extra. Make them experience the consequence of their action.
If you or your domestic helpers have the time to prepare their snacks and lunch I suggest that you make them bring baon to school. You don’t only save but also control the food that your children eat throughout the day. You will hear complaints about getting tired of their food from home and their preference to just buy in the canteen. If that’s the case, involve them in planning the menu. They can get a respite from home cooked meals by buying canteen food once in a while.
Be frugal in giving allowance to your children. This way they will learn how to budget well. Even if your family can easily afford to give generous allowance to your school children, always remember that there are more benefits to a small allowance.
We started giving our sons allowance when they entered Grade 1, around seven years old. We decided not to include the other school materials in computing their allowance because these things are not needed on a regular basis anyway. We buy them their notebooks and other school supplies at the start of the school year.
We have always given the boys something on the low side. When the school prescribed maximum cash a boy can bring was P100 per day in the 90s, our sons’ allowance was P100 per week or P20 per day! It was okay to do that because they continued to bring baon to school.
We taught them how to save from their weekly allowance by providing them with a “treasure box” that worked as their piggy bank. Every week they wrote down their savings in their small notebook. At first they were very excited that there were weeks they would save their entire weekly allowance for a 100% savings rate! In fact, Enrique, our second son even had a weekly savings more than his allowance. And guess what? It’s because he lent money to a classmate who ran out of cash and because he failed to pay on time, he had to pay interest plus penalty. Well, Enrique said it was his classmate who offered to pay the interest and penalty.
When they started using cellphones in the latter part of grade school, we decided that they should pay for their own cellphone load out of their allowance. They learned to do cost-benefit analysis on the best loading mechanisms – sulitext, unlitext, etc. and it was the best way to control their cellphone usage. They would use other free communication channels before resorting to cellphone. I see a lot of teenagers with phone bills higher than mine because their parents pay for their lines.
As they grew older we saw their savings rate go down and there were weeks that they had zero savings. We didn’t want them to drop the habit of saving so we suggested to them a minimum savings rate of 20%. And we asked them to set this aside as soon as they receive their weekly allowance. It was our way of training them the golden rule in Personal Finance, Pay yourself first!
Of course we didn’t stop with their treasure box. When their money in the treasure box reached P500-P1,000 they deposited it in their ATM account.
When their ATM account reached an amount way beyond the minimum balance of P5,000 at that time, we moved the money to higher yielding investments such as fixed income and stocks.
At an early age they understood that they should not leave their money in their savings account if they want it to grow. When I showed them the power of compounding with the aid of an excel file, they were blown away by the amount they can accumulate just by saving and investing money on a regular basis. (Click this link to download free excel file to show your children the power of compounding. You can alter the figures to suit your own circumstances.)
The End of Allowance:
Earlier I mentioned that even if your family can easily afford to give hefty allowance to your children, don’t. Why? Because too much is harmful and can eventually encourage your children to prolong their student life. Let’s face it, once they start looking for a job, chances are their starting salaries will be low and if Papa and Mama’s allowance is even higher, why bother finding a job?
I also see this senorito/senorita syndrome among fresh graduates who opt not to look for a job right away because they want to take a rest. This feeling of entitlement and some cluelessness in the real world is quite alarming. For me, you have to look for a job as soon as you graduate because finding the job with the right fit takes some time. You have to do the rounds of interviews, tests, rejections, comparing offers that come your way, and many more. The thing is, the graduates who usually opt to “take a rest first” are those who didn’t really work that hard in school.
Our arrangement with our sons is that we stop giving them allowance once they graduate from college. Martin, our oldest son, describes it this way, “My parents cut my financial umbilical cord when I graduated from college!” So all his gimmicks, from then on, were funded by his own money. We, his parents, were confident that he would be okay because we knew that he had accumulated a very decent amount from his years of saving and investing.
And since he was used to setting aside no less than 20% of his small allowance while a student, it was a happy transition for him to save and invest a higher percentage each payday now that he’s working.
The Main Lesson:
Teaching our children how to manage, save and invest from their allowance is such a valuable training ground that all parents should take advantage of. It is the surest way to raise our children to be millionaires!
Yes, they can be millionaires even before they start working. It’s not in the big break that they will have once they start earning, nor the lottery that they will win, nor the inheritance that they will get, nor the rich partner that they will marry that promises their financial abundance. It’s in the discipline of “Pay yourself first” regularly that they will earn their first million and enable them to accumulate more and enjoy financial abundance for the rest of their lives.
As our children go back to school this week, let’s sit them down and discuss with them their power to become millionaires before we hand them their allowance!
Wishing you financial happiness,