I admit it–I was wrong to create the chore chart as the sole source of earning allowance money.  Well, I was half wrong.  Several months ago I wrote about the elaborate commission-based allowance system I had created for my kids whereby they would earn a bit of money for each chore completed.  The idea was inspired by Dave Ramsey’s Financial Peace Junior materials, and his reinforcement of the idea on various calls to his radio show.  However, the more I reflected on the idea, the more I didn’t like it.  So, I decided to change it, and created a combination comission system and allowance system.  The plan is scheduled to start in October, and I think the kid are looking forward to the change.

The New Deal

Under the new allowance system, our kids will receive a base allowance based roughly on their age.  To receive an allowance they must complete a basic set of household chores such as keeping their rooms clean, helping with the dishes when asked, putting away clean laundry, etc.  Of course, there will be some things they do as members of the family (put water down for the dog, help set the table, etc.) that will not be included in either the allowance system or the commission schedule.  After all, I don’t get paid to mow my own lawn!

Our kids will also have the opportunity to earn bonuses, or commissions, based on the completion of a variety of advanced chores and special projects.  This is not unlike most sales positions that offer a base salary plus commissions, with the base salary represented by the kids’ regular allowance.  Initially, they will be paid each week on Saturday (chore day) because I want the reward of receiving payment to happen soon after the bulk of the work is performed.  As they get older, we will likely increase this to a biweekly payment plan, and then possible monthly, as they improve their budgeting skills.

How Much to Pay for Kid’s Allowance?

This is the tough part.  There are lots of formulas floating about the web, particularly on kids and money sites and parenting blogs.  Instead of coming up with an age-based amount per allowance “pay period,” I worked backwards from a ballpark figure I had in mind that seemed a reasonable amount for each child.  For instance, my daughter is the oldest at eight, and $20 per month seems like a reasonable amount for an eight year-old to earn as a base allowance.  Subtracting a little for savings, and a little for giving, that is still enough to buy a CD, book, or something that she is wanting.  Remember, she can also do extra chores to boost that amount (more on that later).  $20 per month breaks down to about $5 per week, which is less than the recommended dollar per week per year of age plan.  That is by design.  $5 per week is plenty considering all her other needs are met, but is low enough to encourage her to work for extra money.

The Commission Schedule

Our kids can earn extra money by doing things like helping dad with light yard work, sweeping the back porch and garage, etc.  The commissions for each chore vary based on degree of difficulty, but most range from $0.25-$1.00.  Not a bad deal for a few extra minutes of work each week.  A commission schedule is posted on our refrigerator each Saturday afternoon after the previous week’s payments have been made.  As the kids complete the chores they check off the chore and add up their commissions earned each day (never too early to work on those math skills!).

A Kid-Sized Budget

Our only requirements for the money they earn are that they must divide them into three categories:  saving, giving, and spending.  I want our kids to be savers and givers (yes, the two can co-exist), so to reinforce that idea we tell them to toss their money into separate jars for that specific purpose.  My daughter has several opportunities throughout the year to participate in fund raising activities at her school, such as drives for the American Cancer Society, and other notable charities.  It is much more meaningful for her to put a dollar she earned into the collection jar, than to hand over one I’ve given her.

Do you pay your kids an allowance?  Is it based on their age, or some other factor?

photo by JakoJellema

Over the last few weeks I’ve seen a frequent search term that leads people here to Frugal Dad:  “Should We Pay Off Credit Card Debt Before Having a Baby?”  I make two assumptions from the volume of hits I’ve received–there are a lot of people interested in having a baby, and there are a lot of people deep in credit card debt.  Many financial planners out there advise to have your financial house in order before expanding your family.  In general terms, I think that is pretty good advice.  However, I do not fully subscribe to the idea of holding off on having children just because you owe money.  Here are a few reasons why.

If You Wait for the Perfect Time, You May Wait Forever

So many times in our lives we put things off in the name of waiting for a better time to get started.  Many people put off weight loss plans until next Monday, or next month, or maybe January 1st.  High school graduates put off immediately attending school to “experience life” through backpacking adventures, or working, or just taking a break and living at home.  But those things seem awfully trivial compared to the idea of having a child.  Children are our legacy.  Raising a child is one of the most beautiful experiences two people can share, and it deepens the love shared between partners in parenting.  Because we never know what twists and turns life will throw our way, it isn’t advisable to wait to have children simply in the name of finances.

Kids Are Not Really That Expensive

When you think about it, babies do not require as much upkeep as us adults.  Sure, they must be diapered and fed, and there are a few other baby expenses unique to having children, but babies do not eat nearly as much as grown adults.  Infants have not yet been exposed to commercialism, so their wants and desires are fairly easy to cover without spending much money.  Of course, as they grow older kids do add additional expenses to your household budget.  Hopefully by the time you are school shopping and fitting them for their first bicycle you will be doing better financially, and can easily handle any budget impacts.

Kids Can Inspire Greatness From Parents

When my wife and I decided to try for our first child some thought we were a too young.  We married at 20 years old (well, my wife was 19, a bit shy of her 20th birthday).  We were so young we toasted sparkling grape juice at our wedding!  However, we were both mature beyond our years and neither of us believed in long engagements.  After all, once you’ve met your soul mate, why delay the inevitable?

I had just started an entry level call center customer service job when my wife and married, and I quickly recognized moving up in the corporate world would be more difficult without returning to school to finish up my degree.  I put school on the back burner, and instead spent the first year or so of marriage just enjoying being married.  When my daughter was born everything changed.  It was a reality check that led to a wake up call, of sorts.  Suddenly I realized there was more at stake than just my wife and I surviving, financially.  I wanted nice things for my daughter.  I wanted her to have an easier path than I did (although thanks to the hard work of my mom and grandparents, I had it pretty good, too).

So the summer after she was born I enrolled in a local university, changed majors to business, and embarked on a long, challenging pursuit of a college degree.  It was probably the worst timing possible considering I had a wife and newborn daughter at home, but I was not going to put off the pursuit of my dreams any longer.

When deciding whether or not to start a family, do not allow financial issues to completely dissuade you.  Give more consideration to the partner you have chosen to share this responsibility.  Give more consideration to readying your home for a child.  Do not allow money to control your destiny, and the destiny of your children.

When I was a teenager I worked a diverse set of part time and summer jobs. My first job was at a pizza place taking orders and making pies. From there I moved on to various retail jobs including a couple stores in the mall, a GNC, a golf driving range, etc. I was lucky; back then there was plenty of work for teenagers looking for summer jobs. Sometimes you had to search a little harder, but if all else failed the traditional McDonalds jobs were always there. However, thanks to a rough economy and higher minimum wages, good summer jobs for teens are harder to find.

Should My Teenager Get a Job?

I have mixed emotions. Part of me recognizes the work ethic that can be developed at an early age by the added responsibility of holding a part time job. There is also some financial reward, and the opportunity to earn scholarships. However, there is a downside to teenagers working. Part time jobs take valuable time away from studies, and limit extra-curricular activities kids can be involved in at school, such as sports or after-school clubs. I remember having to quit my pizza job one summer when football camp started up, and I felt conflicted over which activity to continue. Part time jobs also interfere with the social aspects of being a teenager. When friends are hanging out at the mall, or a friend’s house, you might get stuck working until 9:00 or 10:00 at night.

Find Hard Work Before College

By “hard” work, I mean physically hard work. The summer before I left for college, and the summer after my freshman year, I worked for a landscaping company installing sprinkler systems, mowing lawns, and building retaining walls. Pushing a Ditch Witch through a 3/4 acre backyard in 100-degree heat will make you long for pulling all-nighters back at school. There was a time when I wanted to do that type of work, but I decided I would try to use my brain instead of my brawn (although I still enjoy doing this type of work, and even mowed lawns last summer for some extra cash). Continuing my education meant I could do landscaping if I wanted to, not because I had to. It was a good lesson.

Make Savings a Priority

If your teenager does decide to get a part time job, be sure to reinforce the importance of savings. In fact, anyone with an earned income can contribute to a Roth IRA (up to the income limits established by the IRS). Imagine if a sixteen year-old socked away $1,000 in a good, growth stock mutual fund inside a Roth IRA. Even if they never added another penny to the account they would have about $106,000 tax free at age 65. Now that’s a great head start on retirement savings!

photo by Randy Son of Robert

Grandparents have a unique way of spoiling their grandkids. I can’t say much; my grandparents doted on me quite a bit when I was young. Now that I am a father, I can certainly understand why. But in our efforts as parents and grandparents to give our kids everything they could ever want, we are missing out on an important gift-giving option - one that will mean more to them in ten or fifteen years than any toy or video game.

I Want My 529

College savings plans, particularly 529 plans, are becoming a popular alternative to Wii games and Barbie dolls, and for good reason. By starting early, and pooling family contributions, families just might be able to keep pace with ever increasing college tuition costs. Since parents typically shoulder the majority of day-to-day expenses of child-rearing and saving for their own retirements, it is difficult for them to also come up with contributions to children’s college savings plans. That’s where grandparents can help. By forgoing a few wrapped presents at birthday parties and Christmas, grandparents can make contributions to their grandchildren’s college savings plans.

Freshman Fund

Several organizations are cropping up that allow parents, friends and grandparents to contribute directly to a child’s 529 plan. One of the more promising startups is Freshman Fund, a site that allows parents to create an online profile for their children and link the 529 plans they are currently funding. Friends and families may then make direct contributions to the child’s account at freshmanfund.com, and the funds are deposited directly into the child’s linked 529 plan. This sort of “team savings” concept is a popular one on the web today.

Another benefit of this approach is that no cash has to be exchanged between grandparents and parents “earmarked” for college savings. Parents may be tempted to spend the money on something else, and grandparents may be worried about this temptation. This direct approach allows family members to contribute directly to the child’s fund without going through another family member.

Instead of piling on present after present, consider making contribution to a child’s education savings fund. The benefits of education far outweigh the effect of a toy or game, and you’ll be helping parents by taking some of the financial burden of college savings off them.

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photo by Spigoo

Upromise is a free service, and by adding your credit, debit or grocery card means that you can begin saving money for college every time you shop at participating retailers.

I don’t do many product reviews here at Frugal Dad, in fact this may be my first one outside of books. However, I felt so strongly about this product that I wanted to share it with my readers, especially those with children. A couple weeks ago I had the pleasure of exchanging emails with Money Mammals creator, John Lanza. We exchanged ideas on the subject of kids and money, and John shared with me a link to his creation. He suggested my kids give it a whirl and let him know their feedback. Well, I did just that and what I found was an incredibly fun, insipirational way to reinforce solid principles of money management for children. I was blown away with the creativity and quality of their production. John was nice enough to send us a copy of the award winning Money Mammals DVD, which was equally entertaining and held my kid’s attention for the duration of the DVD. It even sparked some good questions from my daughter about the concept of sharing.

Money Mammals, the Baby Einstein of Financial Entertainment for Kids

Very few companies have tapped into the children’s financial education market, which is a bit surprising considering how desperately our children need a proper financial education. Perhaps it is because many still consider financial education a bit boring. I remember suffering through my share of borning finance classes in college, and can imagine the subject of money is even less interesting to a child. However, Money Mammals present their message in such an entertaining way that I suspect kids don’t even realize they are learning. The music, artwork and puppetry is masterfully done in a quality comparable to the popular Baby Einstein DVD series. I even found myself singing the theme song the day after…”We Share and Save and Spend Smart Too. We Share and Save and Spend Smart Too.” Trust me, it’s an addictive little tune!

The Money Mammals Website

The Money Mammals website offers a wealth of resources for both kids and their parents, including links to their online store, Club Money Mammals (which features several games for kids, all centered around the concept of money management), and video presentations. If you have kids of your own, or are a grandparent, aunt or uncle, I strongly recommend you check out Money Mammals today. This is just the kind of thing young kids need today. It would also make a great birthday present to help a little one become a frugal “money mammal!”

Additional Resources:

• Purchase the Money Mammals DVD at Amazon.com
• Club Money Mammals (customized for Rogue Federal Credit Union)
• Sarah Harden, financial consultant for Money Mammals, reviews the concept of sharing
• Product Reviews and Testimonials

Several parents have written to me over the last couple weeks asking for my recommendation on how much to pay their kids in weekly allowance. My response probably surprises them initially, until I have a chance to explain. Zero. I do not pay my kids an allowance. My kids are on a commission schedule. They have a list of chores required of them daily for which they earn a small amount, and they have the option of completing a few extra chores for additional commissions. At the end of the week we add up the totals for each chore completed and they collect a commission payment.

photo by terren in virginia

Allowance vs. Commissions

I don’t like the word “allowance.” It looks too much like receiving money whether you work for it or not. I personally do not believe this helps to prepare kids for the real world where they are expected to get out there and earn a living. So around the frugal family household you actually have to work to get paid (novel approach, isn’t it?). The various daily chores are age-appropriate and do not require a great deal of time to complete. We also include some larger chores for the kids to pick from in order to earn a little extra money. These larger chores are optional, but provide our kids the opportunity to stretch to earn more money.

Sample Commission Schedule

Here is a snapshot of the commission schedule for my daughter. Notice the daily chores which pay $0.05 each are things you would expect an 8-10 year-old to do anyway. The $0.05 is really just my way of encouraging her to get in the routine of completing these tasks every day. By rewarding her with a nickel for making her bed I get better results than fussing about a messy bed later in the day.

The “Extra-Credit Chores” range from $0.10 to $0.50 depending on their degree of difficulty. My daughter loves to work this section (so much so that I’ve had to renegotiate the costs to keep from going broke) when she has a savings goal in mind. If a new CD or DVD is due out that she really wants we suddenly find her wanting to vacuum, dust the furniture, etc. every single day! We try to encourage her not to take it too far, but it is hard not to be impressed by her entrepreneurial spirit.

The “Bonus” section is reserved for any extra chores the kids may be asked to help with during the week. I have plans over the next couple weekends to add some wood stain to our privacy fence. Instead of buying or renting a paint sprayer, I plan to hand the kids a paint brush and let them help. Tom Sawyer would be proud! I will pay them something like $0.25 a panel so they can easily tick off their earnings in their head.

Random Acts of Kindness

The “Act of Kindness” section is something Mom and Dad fill in when they witness the kids doing something nice for others. It could be as simple as holding a door open for a mom with a stroller, or as elaborate as volunteering some of their Saturday to help make crafts for a charity. The point is, we want our kids to be givers and we encourage them to find creative ways to be help others. They don’t receive a reward every time they perform a random act of kindness, because if they got paid for it each time it would change the spirit in which they perform the good deed.

My daughter loves to complete her commission schedule on a daily basis, and looks forward to weekend payments. To really make this tool effective you have to resist the urge to give kids “extra” money throughout the week, or buy them too many extras without requiring them to work and save.

Do you pay your kids an allowance, or commissions?

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Compounding interest is one of those mathematical mysteries that we tend to take for granted. We all hope through diligent savings over the course of many years, compounding interest will continue to do its thing behind the scenes, doubling, tripling and sometimes even quadrupling our money over an investing lifetime. Most adults do not fully appreciate its power and chose to ignore the benefits of making compounding interest an ally at an early age. If grown adults do not fully understand the inner-workings of compound interest, imagine trying to explain it to your kids.

In my own words

I’ve tried to explain compound interest to my daughter, who is eight years-old. She nods in agreement with everything I say, and when I’m finished she summarizes back to me, “So, you are saying if I put $100 in the bank then when I turn sixteen the bank will give me $200?” That’s a pretty aggressive return, but she has already grasped more of the concept than I understood at her age (and older). She is kind of like her dad, she understands these concepts, but they are not really solidified for her until she sees them in action.

Compounding Pennies

I gave my daughter a Ziploc bag with a handful of pennies and told her over the course of a week I wanted her to give me a penny a day. For the next seven days I would be her personal banker. I would deposit the penny in “The Bank of Dad” and compound interest would begin to accrue the day she deposited the penny. At the end of the week we would check her balance at the “ATM” (Automated Tell-me-how-much-money-my-dad-has-for-me Machine). Fortunately, she is already checked out on how to use this kind of ATM.

Each day my daughter handed over one penny at the breakfast table and I deposited it in her bank - which is really just an old plastic film container with a lid. I gave her a “receipt” for her deposit and explain that she needs to keep up with the receipts to see how much money she has added to her account. In an effort to make this a little more realistic, I deposited a penny from my own piggy bank every other day to give her an additional four pennies at the end of the week. I could have just matched her penny for penny, but I didn’t want to set the unreal expectation that it is easy to double your money in a short time.

Balance Inquiry

On Sunday evening we gathered receipts and confirmed she had deposited seven pennies in “The Bank of Dad.” I asked her how much money that represented, and she correctly told me, “Seven cents.” Using that ATM she is so familiar with, she performed a balance inquiry. I opened the old film container and counted out its contents - all eleven pennies. “Hey, there are four extra pennies in there!” Yes! She got it! I explained that her original seven pennies had grown to eleven pennies because every couple days the bank paid her a penny for letting them use her money - that’s interest. I gave her back all the pennies and told her to put them in her savings envelope. She paused and asked, “Dad, what would happen if you deposited like a hundred million pennies in the bank?” Well sweetheart, you would have a lot more money than The Bank of Dad does!