This is the third of three posts about Allowance Best Practices (ABPs). The first, “Don’t Get Burned by Giving Allowance Without Structure”, covers the topic broadly. The second, “Allowance Best Practices for Kids 12 & Under”, began our discussion of age-appropriate guidelines.
How much?
By age 13, almost everyone has some experience earning, receiving, and/or spending money. Teens often babysit, teach swimming or lifeguard, become camp counselors, complete significant yard work, and/or receive money as birthday or holiday gifts. As such, they are well beyond the more fundamental lessons of counting out coins or including sales tax in the total cost of a purchase. They are also typically ready to assume responsibility for some of their own personal spending, which translates into giving them more money than a simple multiple of their age (in years) will provide.
Depends, but usually more than their age in dollars per week.
How much more? Well, that depends on what you want your teen to assume responsibility for. What our parents did with us, and what we have seen work well in other families, is to establish annual amounts (“buckets”) to be spent in broad categories such as clothing, sports team fees, personal toiletries, school supplies, and meals consumed outside the home.
Ask your teen to list all the expenses they anticipate for the coming year under each category. The first time they do this, they almost always underestimate what they’ll need. Decide what percentage (80% of their clothing, but only 25% of meals outside the home?) you are comfortable funding, and establish a disbursement schedule for allowances at intervals throughout the year. Some teens can handle monthly or even once-a-semester allowances. Others need the ongoing structure of weekly payments.
Establish spending buckets, then if teens can borrow from one bucket to make purchases in another.
A critical agreement needs to be made about whether or not your teen will be able to overspend in some categories by “borrowing” from others. For the record, we like the idea of being able to borrow from one bucket to fund a purchase in another, as it can be a powerful lesson in the crowding-out effect of bad decisions. Spend too much on Pizza, and you won’t have enough for the new shoes you want!
Yes, to digital receiving and spending of teen allowance.
Teens are ready for virtual allowance distribution via automatic bank deposits or other tools. Online billing and payments are increasingly the norm, so some experience executing them safely before going off to college will be helpful. Ask your teen to calculate the DIMS SCORE® for possible purchases over a specific dollar amount (e.g., $50). The DIMS SCORE® Calculator only asks the questions most adults want to be addressed before agreeing to spend money. You can’t always be with your teens, but you can help them establish habits that allow them to avoid purchases they may quickly come to regret.
Prom outfits are expensive but teach good lessons.
One of our favorite examples of crowding out is how spending too much on Prom can prevent families from paying for perhaps more meaningful purchases later on, e.g., back-to-school clothes for college in 8 short weeks.
Families have told us how stressful prom dress shopping, in particular, can be. In minutes, your teen can calculate the DIMS SCORE® for special occasion clothing. They may still decide to spend more money than you might like on a Prom outfit, but they might take it to a consignment store once they are done with it or purchase an outfit that can be worn to more than one event. Overspending when you still live at home is a mistake most teens can recover from.
Be prepared to monitor and adjust as the year following a birthday progresses.
As we discussed in our first allowance post, the third decision of Allowance Best Practices is to decide when current methods will be assessed for required adjustments. This third step is critical for teens in their first year operating with annual allowance buckets/amounts. Trust us when we tell you that teens will not always spend wisely when they get their first bigger taste of financial independence. So, monitor their spending from a distance and be prepared to adjust the frequency of disbursements to help them stay on track. What you want to avoid is topping up the agreed-upon annual amount until the end of the year.
Bailing your kids out of overspending while they still live with you is the surest path to having to provide them with “Economic Outpatient Care*” when they become adults.
Don’t be the subject of a future haunting podcast.
There was a haunting series of podcasts making the rounds last summer about a 22-year-old woman in Georgia who mismanaged a fully paid college fund to the tune of not having enough money left for her senior year! She blamed her parents for not teaching her how to budget and plan better. While this young woman portrays an extreme example of “allowance gone wrong”, her family’s experience reminded us of the adage: “If you don’t have time to do it right, you must have time to do it again.”
After much back-and-forth, Kim’s parents co-signed a loan to replace the spent funds, which allowed her to return to school. The DIMS SCORE® Calculator might have prevented Kim from overspending in the first place!
Please click on the blue or green buttons below to learn more about our approach to early financial education.
*Economic Outpatient Care is a term coined by the authors of The Millionaire Next Door. It refers to the giving of significant or consistent gifts of money to adult children in an effort to bridge lifestyle gaps. It has been shown to reduce overall financial well-being on the part of both the giver and receiver.
Allowance For Parents Gifts & Holidays
