How to effectively use allowance to teach your kids

Do you give your kids allowance? Or have you tried it before and just felt like it wasn't working? I don't think you're alone.

What do I know about allowance? Absolutely nothing. Little Man isn't even two yet so we are still working on not dumping out the entire bottle of bubbles all over himself and not spitting milk into the plants (nice right?). You've been there, I'm sure.

I was recently chatting with a dear friend who has three amazing teenage boys. She is the kind of person that makes you wonder, "Are you for real?" and then after getting to know her you realize she is. Somehow we got onto the topic of allowance and we started talking about what she and her husband did with her boys. I was taking major mental notes in my head. (I turn into a little sponge whenever she opens her mouth).

So, instead of using allowance as an incentive or reward for actions, she uses it to teach her children about money.

She teaches them about taxes, spending, saving, donating...all from the ripe old age of five. Genius! Teach your five year old about taxes. Crazy? Not really.

Her idea is that children should understand the way the real world works from the beginning. That way when they are out on their own, they already understand that they aren't actually going to see all of the $10/hour they are making.

So how does she do it?

She decided to give each of her boys $1/week for each year old they were. (So her 5 year old got $5/week).

So if you have a 5, 7, and 9 year old, that would be $21 a week which is $7665/year out of your pocket. BUT...here's the catch. Her kids didn't see all of that money.

Here's where it went:

The 50% savings turned into about $5,000 by the time her kids were ready for college. (They are actually going to use it to help their boys serve a mission for The Church of Jesus Christ of Latter-day Saints). How is that for a little help with college expenses? Having 50% go to savings really just allowed her and her husband to save for their education starting when their kids were young.

The 30% family tax goes to family vacations, expenses, and fun. This teaches the kids that even if they don't like it, they don't get to keep all of their money. Meeting Uncle Sam for the first time might feel a little familiar.

The 10% to charity teaches the kids to always reach out to others and give.

And the 10% spending eliminated the "I hate you mom" screaming episodes at the grocery store. If my friend was ever in the checkout line and one of them couldn't live without a candy bar, she pulled out her record of their spending money and let them decide whether or not the candy bar was really worth spending their own money on.

BUT...she didn't end there. Once her boys were old enough to understand a bit more about budgeting she let them at it. (Want to know more about budgeting? Check out my budgeting series here.)  She figured out how much each of her boys would get in spending money total for the year (based upon their age) and she gave it to them in cash at the beginning of the year. That way, they had to figure out what they would use each month so they wouldn't run out before the year was up. And since they were still under her roof, there were plenty of discussions (and a little lending here and there) to help them understand the concept.

How about that? Teach your kid about taxes, saving, spending, donating, AND budgeting with a little allowance. Stop using allowance as an incentive or reward and start using it to teach your child about money.

How about that? Does anyone have any other allowance ideas that have worked consistently? I am all ears and a little sponge ;)

And don't forget to check out all the wonderful places I party!

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˚budgeting series-part 8˚ The End.

Now that you have had a few weeks to track your expenses, how is it going? It's kind of hard isn't it? Don't give up. Do you remember this post  where you committed to doing 4 months? You can do it! And keep your eye open for money saving tips on this blog so you can live within the budget you developed. And last, keep it changing. Life changes...so should your budget.

*Update: click here to see part 1, part 2, part 3, part 4, part 5, part 6, part 7, and part 8.

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˚budgeting series-part 7˚ Tracking

So you've done all the hard work, and now its time to make everything look pretty.

There are a few methods to tracking your expenses. Some people love a spreadsheet on the computer. You can put formulas in the cells and all the adding will be done for you. 

For us, that doesn't work so well. We never remember to enter our expenses, and our budget became more of a accounting of where our money had been spent, rather than a way to budget our money and make sure we didn't overspend. 

What do we do?

The good, old-fashioned paper on the fridge. That's right. We print out a budget sheet each month and keep it on the fridge. That way it is staring us in the face every time we reach for a glass of milk.

Don't believe me? Come on over and you can look for yourself to see how much money we have left in our food budget for the month. 

So, I thought I would share the method we use to track our expenses. Here is the document we use. You will probably have to adjust it for yourself, but this will give you a good idea of what goes on around this house. 

So let me explain a few things:

1. These are the categories that we have developed (and adjusted) over the years. They work for us and they are always changing. That's a good thing. Once you make a budget, you are going to have to adjust it occasionally. 

2. Under many of the categories, you see this: $ XX + __________= _________. We have the set budget amount ($ XX) for the month. We add (or subtract) the leftover money we had from the previous month to get our new budget amount for the month. Make sense? Let's say my food budget for the month was $300. And last month, we spent $302. I would take $300 - $2 = $298. Make more sense? We do it this way so we can save up in a category if we know we will want more in that category for a certain month (like the gift category in a birthday month). I'll be honest. It doesn't always work out. But it is really fun to try. It is also a big motivator to try and stay in the budget because if you don't there are consequences coming next month.

3. In our church, we pay a tithing and give other donations. We don't include that in our budget (mostly because we don't make enough money right now to include that). So it is pretty much just coming out of savings. 

5. The little box at the bottom of some of the categories is to write how much we underspent (or overspent). If we spent $250 of $300 in our food budget that month, we would write +50 in the box (and that +50 would transfer over to the next month.) If we spent $325 out of $300, we would write -50 in the box (and we would have to subtract $50 from next month's food budget). This helps us be motivated to actually stay in our budget. 

6. We try our best to write down the date, store, (or item) and total we spent every time we spend money. We also add up totals a few times in the month so we can see what we have left to spend in each category. 

PHEW!

And before I go and let you experiment to see what works for you, I will leave you with one more great resource.

Mint.com: This resource is a place for you to be able to see all your accounts. (Saving, IRAs, checking, etc.) You can't transfer any money on this site, but you are able to see everything. It is protected the same as a bank website (and you can learn all about it on their site). You can also budget, set goals, and get recommendations for good financial planning. 

While Mr. Candid and I use Mint.com as an overall reference, we really prefer the paper on the fridge. 

It just works for us.

Now go find what works for you and start tracking your expenses!

*Update: click here to see part 1, part 2, part 3, part 4, part 5, part 6, and part 8.

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˚budgeting series-part 6˚ Spending Less Than You Make

If you are looking for the FULL budgeting series, click here.

How did assigning dollar amounts go last week in this post?

Now that you have an income total and a list of categories with the dollar amounts you spend in each one, we are going to find out if you will spend less than you make. If not, we will just make a few adjustments. 

First, add up the total dollar amount you will spend according to your budget. Now, compare that number to the total income you make. Find out what the difference is. Hopefully, you make more than you spend. If not, go back to each category and adjust the numbers (you might have to do a little sacrificing here) to make your income equal or greater than the amount you spend. 

Clear as mud?

Next week we will make our budget look pretty, and start tracking our expenses. See you then!

*Update: click here to see part 1, part 2, part 3, part 4, part 5, part 7, and part 8.

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˚budgeting series-part 5˚ Assigning $

This week, we are going to assign some of the $ values to the categories. Sound hard? Well, what if I told you that the dollar amounts you assign don't have to necessarily be right? And, you don't even have to look at the income your calculated last week. 

Sound easier? 

Good.

First, take the categories that remain fairly constant each month (by fairly, I mean give or take a few dollars) and write down how much you spend in each one. Yours might end up looking something like this:

Rent $600

Internet $14.95

Saving/Investing $100

Phone $50

Life Insurance $19.50

Rental Insurance $14.00

Auto Insurance $80

Look back to the list you created in part 3 to find more categories that might remain constant for you. These might be health insurance, piano lessons, debt payments, etc.

Once you have assigned the values for the fairly constant expenses, move onto the others. Take your best guess and don't stress over it any more. Next week (and over the next month) we will refine a bit and make things a little more accurate.

Then, give yourself a pat on the back, leave a comment to let me know how you are doing, and come back next week for some more budgetting fun! (Boy am I a nerd!)

*Update: click here to see part 1, part 2, part 3, part 4, part 6, part 7, and part 8.

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˚budgeting series-part 4˚ Income Guessing

So how did it go? Did you complete the list of categories where you spend all of your money each month here in part 3 of our budgeting series? If not, you can do it this week.  

If you are just joining in, click here for the first three parts of the series.


This week, we are going to figure out average income. For some of you, this will be cake. If you are like us, your income changes slightly each month and is a little more difficult to calculate. 


So...list all of your sources of income. 


Some of them might include:


Salary
Tips
Babysitting money
Teaching piano lessons
Tutoring
Home businesses
Monthly much appreciated gifts from friends and family (I wish!) 
Etc. 


Now, put a star by the ones that are fairly constant (within $50 or so each month) and list the income you receive by those ones. For the income sources that change drastically each month, take a good guess of the average income from those sources over the past three months and write down those amounts. 


Now add up all the categories to get your average total income each month (feel free to laugh or cry depending on the amount. I tend to do both when I complete this step). 


And that's it! Check back next week and you will really start to see your budget unfold. I told you we would take this nice and slow...
didn't I?

*Update: click here to see part 1, part 2, part 3, part 5, part 6, part 7, and part 8.

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˚budgeting series-part 3˚ Make a List

So how did it go? Did you complete the tasks that were listed here in part 2 of our budgeting series? I hope so. If not, it is not too late, but hurry and get on track so you can keep up with the series. 

Click here for the first two parts of the series.

This week's task is pretty easy. (That is a good thing right?) All you have to do is make a list of the categories that you spend money on. Don't fret (I love that word). It is easier than you think, especially with the tools I will give you in this post. All we are looking for is a list. Bullets...numbers...doesn't matter. Just a list.

So, take 5 minutes and write down the categories where you spend your money each month. I will get you started: Rent/Mortgage, food...now keep going. Before you look at my list, try and do it on your own. Then compare the two. 

Here are the categories we use:

Rent

Utilities (including electric, gas, and internet)

Saving/Investing

Phone

Food

Gas/Oil changes

Gifts

Fun

Insurance (including life, rental, auto, health, etc.)

Miscellaneous

Medical

Clothes

Education

Charity 

Other things to think about that I don't have listed: 

Debt payments (credit card, school loans, car payments, etc.)

Tap dancing lessons (or any other activity you/spouse/child might participate in on a monthly basis)

Eating out
TV 

Mortgage

Transportation

Travel

Keep your list handy because next week, we will need it again. And give yourself a pat on the back. You are on your way to "financial freedom" (as Dave Ramsey would say. Can you tell I like that guy?)

*Update: click here to see part 1, part 2, part 4, part 5, part 6, part 7, and part 8.

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˚budgeting series-part 2˚ Let's Start Slow

Alright. Let's start slow. One of the most important things about budgeting is actually doing it. BUT...sometimes it is hard to budget by yourself. Especially if you "share" money with a husband/wife/significant other/kids/etc. So first you have to convince yourself that it is actually worth it.

To be honest, budgeting is difficult. But, lets focus on the why we want to budget part. Do you remember this post? (Zambia and starving children...those might be a few reasons why you want to budget). But let's think a little more long term. How would you like to retire with 7 million dollars? (I can't even imagine what that would be like...) Or have a fully funded college fund for each of your grandkids? (Not to mention kids...and you probably don't even have grandkids yet).  And what about having little to worry about when you or your husband/wife can't find a job for a year. (Can you say emergency fund?) Budgeting gives you the peace of mind by knowing how much money you make, and what you do with it.

But really. Around here, we know where our money is going. We know exactly how much we make. And, it feels pretty good to know that we are thinking about the future. Many people aren't. For example, today I was eating lunch at work with a fellow co-worker. She is 58 years old, and she still has a student loan. She was hoping that it would be paid off by the time she retired, but she wasn't sure. Really? I wonder how many years she has had a student loan. Why not pay it off early and stop paying someone else to lend you money? She was also planning to rely on Social Security in order to live once she retired. Me? I am not planning on getting anything from Social Security, so I have to plan ahead.

So this week you should focus on two things:

1. Commit to developing a budget and trying to live by it for 4 months. (That really isn't that long...)
2. Tell your significant other/husband/wife that you want to live by a budget. Tell them why.

Like I said...we are starting slow. And if you follow right along with this series...you are already on your way!

*Update: click here to see part 1, part 3, part 4, part 5, part 6, part 7, and part 8.

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˚budgeting series-part 1˚ The Dave Ramsey Show

Is it weird that I get a little teary eyed when people call into the Dave Ramsey Radio show and do their debt free scream?

What? You don't know what I am talking about?

Dave Ramsey is the debt free man of the year. He puts on a radio show about how to get out of debt. He even provides baby steps for you to follow. Pretty cool job he has. Want to know more about it? Check it out here.

(And just so you know, I am not getting paid to share this info...just sharing what I listen to sometimes when I am needing a little company at home. Nerdy? Maybe a little.)

A big part of Dave Ramsey's program is budgeting. Ugg...Did I just say that on a blog? Lame. But...how would you like to:

 be filthy rich?
retire in style?
drive any car you want?
buy me a house with cash?
travel to Zambia to visit the giraffes?
donate enough money to save 1000 children?
remodel the house you haven't even purchased yet?
shop without worrying about how the heck you are going to pay for it?

Me! Choose me! (especially for the Zambia and save the children thing)

Budgeting can be fun. Really. I think many of us just have no idea where to start. So, in this little series I am going to show you the process I went through to create and (more importantly) live by a budget. It is kind of a game in this house.

I don't guarantee that this is the best way. It is just what works for us. So, check back every Wednesday for the budgeting series and start budgeting right along with the series.

*Update: click here to see part 2, part 3, part 4, part 5, part 6, part 7, and part 8.

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