How to Raise Financially Independent Children (Maybe and Hopefully) by Jon Anderton (my husband!)

Last week our eleven year-old son asked to be taken to Big Five so he could get another pair of shoes and "tights," the stretchy, skin-hugging athletic pants worn by a lot of kids these days. He ended up spending $85 ... of his own money. Most importantly, I don't think the thought that his parents should cover the purchase ever crossed his mind. This was probably the most amount of money he'd ever spent at one time, and I was happy to see the smile on his face as he felt the thrill of financial independence. What do I think has been the biggest factor in encouraging this type of behavior? His allowance.

When our oldest was five or six (she turns 18 this year), we starting thinking about giving our two oldest children an allowance. I remember researching the different schools of thought on how much, how often and whether or not to link the allowance to household chores or some other responsibility. I remember being surprised by the variety of opinions, and even more surprised by the passion people have for their own opinion. We're talking about money, though, so maybe the variety and passion aren't so surprising. In the end, we landed on a system that has remained remarkably consistent over the years, and in my opinion, is the primary driver for the type of behavior in the story above.

Each of our children receives a weekly allowance that is not only generous but also completely separate from any responsibilities, such as chores or good behavior. You might disagree, but we view chores as an expectation, and don’t feel the need to incent good behavior with money. So, our kids get their allowance even if they were snots all week, or if they forgot to do their chores, or if they broke the flat-screen TV with a bouncy ball (admittedly I almost pulled his allowance indefinitely). Structuring it this way allows you to use an allowance exclusively as a money management tool.

How often, how much and what you’ll pay for vs. what they’ll pay for are the key questions to ask yourselves when setting up an effective allowance.

Monthly works well for us. The two oldest have bank accounts and debit cards, so their allowance is just transferred over monthly. They are responsible for checking their balances and not going negative. The two youngest have their allowances tracked in Excel - amounts are deducted by us when they spend.

How much to pay is determined by our budget and by deciding what we’ll pay for vs. what they’ll pay for. Ultimately, we try to shift purchases from our sphere of responsibility to theirs, so we are as clear as we can be with expectations and don’t budge. Amounts are adjusted periodically, based on age and whether or not they have a part-time job. In the end, the amounts we settle on should be enough for them to always have money available, which will encourage them to think of their money first. Two of our kids are reasonable spenders, while the other two sometimes run a pretty low balance, so we have more conversations with them about making more thoughtful choices with their spending.

Having clear expectations on what they’ll cover also gives us the opportunity to surprise them. They might think they’re covering the entire cost of their new coat, but you swoop in to cover half, rewarding them for saving up. Our kids think they won the lottery when this happens!

Allowance can also be used to help develop sharing and saving mindsets. We determine how much to carve off into "sharing" and "saving" buckets, generally one-third to savings and ten-percent to sharing, while they are responsible for watching their savings grow and choosing a cause for their year-end donation. Our hope is that they internalize how important and meaningful sharing and saving are as part of a healthy financial life.

If structured well, an allowance can become a powerful tool for helping you develop your children's financial independence, as well as provide you with lots of opportunities to teach and connect. How do you manage allowance (or not) and what have you seen as the long-term positive/negative effects?

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