Wise Money Decisions

In an admittedly non-scientific study of the wealthiest 400 Americans, Forbes reports that a “significant percentage of them had parents with a high aptitude for math.”

“The ability to crunch numbers is typically a key to becoming a billionaire. Often, mathematical prowess is hereditary. Some of the most common professions among the parents of American billionaires for whom we could find that information were engineer, accountant and small-business owner.”

My dad has a graduate degree in math and taught college-level math. I won’t complain if the trend continues and I end up with a billion dollars.

Seriously, I never thought that math would make me rich. And it hasn’t yet, at least not enough to be part of the Forbes study (only a billion more and it will!).

But somehow I always knew it would open doors.

And it has. I was able to receive a graduate engineering degree from a good university because of math. I believe a big reason I was accepted into a good law school is because of math. I use math every day in my business and in countless other ways. 

I don’t know if it was nature or nurture. Probably a combination of the two. But I think it’s fair to say my love for math has affected my life more than anything other than the Three F’s, family, friends, and faith.

It’s important for all parents to help their kids develop a love for math. And if not a love, then at least a working knowledge and an appreciation.

They won’t become billionaires, but they will find more doors opened for them. They might not become rich, but they will avoid the anxiety that many people feel every time they are asked to do a math problem. They might not become a successful entrepreneur, but they will avoid the easy (and sometimes costly) mistakes made by the math illiterate.

In the short time I’ve done this blog, the most widely read article by far is how my parents handled allowance.  When I mentioned it to the friend that gave me the idea for the article, he suggested royalties are in order. 

He can name his price as long as it’s based on a percentage of my site’s earnings.  Zero times anything is zero.

Back to allowance.  I came across a well-written article by Jennifer Allen at Scholastic that gave suggestions on how to handle allowance for different age groups.  It has some good ideas. 

When to Start 

She suggests starting at age 5 or 6, but that it depends on your child’s maturity.  Some kids might be able to handle it earlier and some later. 

I nearly made the mistake of starting my 2-year-old daughter on allowance tonight.  We were at her favorite restaurant Taco Bell.  She wanted candy from a candy machine.  She stuck her hand up as far as she could but couldn’t reach anything.   

I briefly thought about giving her a quarter and telling her it would be the only one.  It’s a rookie mistake I might have made a few months ago.  I’m smarter now.   There’s no way on God’s green earth she’d let it be the only quarter.

Yes, two years old is too early to start allowance.

Is it a Good Idea to Tie Allowance to Chores, Grades, Behavior?

The Scholastic article believes allowance should be a teaching tool rather than a disciplinary tool, and therefore recommends against tying allowance to chores, behavior, or grades.  The author believes kids should do chores by virtue of being a member of the family and not because there is a reward.

At this point I don’t have a strong opinion either way.  I can understand trying not to confuse kids by crosswiring a teaching tool with a disciplinary tool.  On the other hand my allowance was tied to chores and behavior and I lived to tell about it. 

How Much Allowance?

An expert cited in the article recommends a weekly allowance of 50 cents to a dollar for every year of age.  A 10-year old would get $5 to $10 per week.

It’s a lot more than I received, but maybe it’s the right amount these days. 

Somewhere in there is an opportunity to teach your kids some math.  For example, double your child’s allowance if she can successfully use the Rule of 72 to figure out her allowance in 1984 dollars.  No, don’t do that.

Other Suggestions

Another suggestion I found interesting:

“As your child grows, so should his responsibility for his own discretionary spending. Keep track of what you spend on him for a couple of weeks. Then, choose one or two nonessential items that you will cease paying for, such as after-school snacks, comic books, baseball cards, or iTunes downloads. ‘Explain that you’re no longer paying for those items, but instead will give her an allowance equal to the amount you’ve been spending.’ “

I think the idea has merit.  It would get your child to think about budgeting and priorities. 

By the way, do kids buy baseball cards these days?  I hope so, it means I’m not too late to get some value out of the four boxes in the corner of my closet.

Bailouts

Finally, the article suggests that you not bail out your child if she gets buyer’s remorse or runs out of money.  Seems right to me.  If they have buyer’s remorse, you could help them return the item or sell it on Craigslist. 

If allowance is meant to prepare them for real life, they should learn not to expect bailouts.  Just don’t tell them about the Savings and Loan scandals, Bear Stearns, or the mortgage crisis.  That would just give mixed messages.

Conclusion

It will be a few years before I have any experience with kids old enough for allowance.  Until then I’m not planning to form strong opinions about how to handle allowance.  But it’s one of those things that’s good to start thinking about before it sneaks up on you.

A few weeks ago I wrote about how my parents and one other family handled allowance. 

Since then I’ve come across two allowance articles worth sharing. 

New York Times Article

Alina Tugend has an interesting 2006 article in the New York Times about the “slave wage” allowance she paid her kids.  It’s worth a read.  She mentions two studies that I found interesting.  The studies are a few years old, but I doubt much has changed in the world of allowance over the last few years. 

The first study:

“A 2005 survey of almost 1,500 children by Yankelovich, a research firm, found that the most common weekly allowance for 6- to 11-year-olds was $5 to $9, and $10 to $19 for 12- to 17-year-olds. Around 15 percent of 12- to 17-year-olds received $20 to $49.

“Forty-one percent of those surveyed said they bolstered their allowance by doing extra chores around the house or jobs like baby-sitting; interestingly, more than 40 percent of children in all age categories said they received no allowance.”

It says the most common allowance was $5 to $9 per week.  But 40% received no allowance, so actually it seems the most common allowance was zero!

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For those of you who read personal finance blogs on a regular basis, the Carnival of Personal Finance needs no introduction. 

For those of you who might be new to personal finance blogs, let me explain.  The Carnival of Personal Finance is a weekly collection of recent interesting articles about personal finance topics from various authors.  It is an opportunity to see what other people are talking about.  For a new blog such as mine, it is a great opportunity to showcase a recent article and let people know about my site.

The Carnival recently put out its 142^nd edition.  There were over 100 submissions.  Eight were chosen as “Editor’s Picks” including my recent article Using Allowance to Teach Kids About Money. 

You can find links to the eight “Editor’s Picks” at Carnival of Personal Finance as well as at the site of my fellow San Mateo County resident Baglady, who hosted the Carnival this week.

Other authors linking to Using Allowance to Teach Kids About Money:

Beyond Paycheck to Paycheck likes the second family’s approach.

Kimberly “Alpha Consumer” Palmer at US News & World Report mentions the article.

Donna of Smart Spending at MSN Money discusses the article in detail.  Thanks for the great mention Donna!

Father Sez

Debt Beater

Today a friend told me how much he gives to his kids as an allowance.  It got me thinking about the ways I might use allowance to teach my kids about money. 

When I was a Little Jeff

When I was growing up my dad kept a spreadsheet in Lotus 1-2-3.  If you know what Lotus 1-2-3 is, then you might be older than me.  The spreadsheet calculated each kid’s allowance based on age and various other factors.  I’m not sure what the other factors were.  Dad, if you read this and if it’s no longer a trade secret, please feel free to disclose the other factors in the comments. 

A penalty was subtracted for leaving chores undone, disobeying, and other delinquent behavior.  The spreadsheet required just a few user inputs, and then automatically updated itself to calculate the allowance for each kid. 

Allowance was paid at irregular intervals.  It didn’t matter how often because the spreadsheet took into account the time elapsed since the last allowance.  The spreadsheet figured it all out. 

When it came time for allowance my dad printed out the spreadsheet.  We sat down as a family and my dad distributed each kid’s allowance.  My typical allowance would be about eight bucks.  It was never a round number because the spreadsheet was precise.  If the spreadsheet said $8.77, I got $8.77.  No rounding.

Each kid had a little cardboard bank.  My entire net worth was in the bank.  I liked to have a mix of coins: quarters, nickels, dimes, and pennies.  I was always short on dimes for some reason.  I tried to trade away quarters and nickels in exchange for dimes.  I would say to my brother: “I’ll trade you FIVE pennies for ONE dime.  You’re getting five and only giving up one.  I think you should do it.”  It worked until he got older. 

One of my brothers always had large penalties.  The penalty deductions would zero out his allowance and then some.  He had to put money back into the allowance pool.  To this day he jokingly insists he paid most of my dad’s mortgage.

No allowance was paid when you had a real job.  In fifth grade I got a paper route.  I never got allowance again.  It was a smart rule that kept my parents solvent through eight kids.

One Family Uses Capitalism

My friend told me of a family that used a free market system.  When a job needed to be done, the parents got the kids together and auctioned off the work.  Each kid was allowed to submit a bid.  The kid with the lowest bid won the right to do the job.  For example, the parents might auction off the right to take out the garbage for a week.  If the lowest bid was $5, then that kid would take out the garbage for a week and make $5 in the process.  Then they might auction off a harder job, like mowing the lawn.  The lowest bid might be $10.

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