This is an installment of the ongoing “Fatherpreneurship Series”, which is defined here.

Money gets people all twisted up, both in business and families.  My wife and I got tired of negotiating with our six-year-old son everytime we went to the store to buy something, especially for a birthday gift for a friend’s birthday party.  It was time for an allowance.

Generally, we would think pretty hard about something like this.  We would talk to friends, consult books, ask the ouija board.  But we came to quick conclusion on how to proceed.  We were pretty aligned on the value and purpose of money as well as the responsibilities we wanted our son to have.   We decide that we would try something quickly and make adjustments if needed (for which we made sure we warned our son).

The allowance had the follow attributes:

•  The allowance was not tied to chores or behavior.  He gets his allowance despite behavior and outside chores.  Bad behavior led to lost privileges (GameBoy, sweets, etc).  Chores are part of family life and we all do them without direct monetary compensation.

• The allowance is to pay for all the kid’s discretionary spending.  With few exceptions, we no longer buy him discretionary items.  If he wants to pump quarters in the video arcade at the pizza place, that is his money.  If he wants to buy something at the museum store, he needs to buy it himself.

• We give him $10/week.  We do this on Saturday.

• Of this allowance, he must do the following:

  • 25% of the allowance goes into savings.  I don’t have a great explanation to a kid on the benefits of savings, but he seems to understand the rainy-day and future nature of savings.
  • 10% goes to a charitable fund, which he can dispense to a charity of his choice
  • That leaves $6.50/week for spending.  It seems like a lot to me, but so far, it seems to be working OK.

Some nuances, which I have not yet broken out (and may not break out) include:

• Matching 1:1 any money he moves from spending to savings,
• Adding an interest rate to savings.
• Adding an interest rate to any borrowings. 
• An old friend from college, when she heard about this plan, said that she certainly was taught how to save, but not how to invest.  Good point.  I’ll need to think about that as well.

We’ve put the responsibility on the kid to make decisions on what to buy, which is fascinating to watch.  I hope that he understands the value of savings, the discipline of spending, and the warmth of giving.  So far, it’s been a very positive experiment and, thank goodness, has stemmed the nagging at the store.

Note: we use Google spreadsheet to track the simple calculations.  I’ve put up a template, which you can copy and use yourself:
http://spreadsheets.google.com/pub?key=pyRRMru19_p6OCJ3s7kZcWA