Tips-Allowances

Determining the right allowance

You may often hear about rules of thumb - like 50¢ times age - as a logical way of setting the allowance. It sounds logical - almost scientific because there's a formula. But really, it's totally arbitrary because it's not connected to anything in the real world. You can get away with this simplistic approach when your children are young (eg 6-8). At that age, their needs are limited so any amount will be instructive.

However, as your children get older, they will only learn realistic life lessons if their allowance is connected to the cost of things in the real world.

This doesn't mean more family spending. The big change is that you're now shifting the management of this money into your child's hands. Figure out what expenditures you're prepared to allow him/her to manage and make decisions about. You can do this using our Advanced Budget tool or any other approach you find handy.

The magic is in the sense of ownership and responsibility you'll be giving to your child. It will help her learn that life is about choices - how to earn, save, share, and spend wisely.

That's an understanding you want to foster - and what Active Allowance is really all about.

How many Expense Categories/Bank Accounts should they have?

While many adults use only one or two bank accounts in real life, we find it's really useful for kids to break things down a little finer as they learn to budget. For the youngest children (age 6-7), you might start off with just one account - perhaps call it "FUN".

But very soon, they're old enough for you to start addding others. For example, you might create an account for Charity and explain to your child that he needs to think about which charity he wants to support with his money. That will be far more instructive than just telling him what charities your family supports.

An additional important benefit of creating multiple Expense Categories/Bank Accounts is in the setting of rules. For example, in our household, the kids may spend money from their General/Recreation Bank Account for anything they choose that doesn't break any other family rules - like buying ice cream just before dinner. However, money in their Clothing Bank Account may only be used for Clothing, Gifts, Charity or Long-term Savings.

Rules for Transferring between accounts

Like most choices in Active Allowance, it's totally up to you and what's right for your family. These are a few key rules we use in our family:

1.    Our kids may use their General/Recreation funds for anything they choose that doesn't break other family rules (for example, no ice cream before dinner).

2.    Their clothing budget can only be spent on clothing or shifted to their Gifts, Charity or University accounts. However, they do not need to buy the clothing items that were in the budget. They have complete freedom to buy different clothes than originally planned or save it up and use it to buy more clothes in their next budget period. They are not penalized for under spending.

3.    Their other three accounts (Gifts, Charity, and University) can only be used for the intended purpose.