Allowance Best Practices for Teens
This is the third of three posts about Allowance Best Practices (ABPs). The first, “Don’t Get Burned by Giving Allowance Without Structure” was published on March 4th. The second “Allowance Best Practices for Kids 12 & Under” was published on March 11th.
Most everyone has had some experience earning, receiving and/or spending money by the time they are 13 years old. Teens often babysit, teach swimming, 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 change or including sales tax in the total cost of a purchase. They are also typically ready to assume responsibility for more of their own personal spending, which translates into giving them more money than a simple multiplier of their age will provide.
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. Decide what percentage you are comfortable funding, and establish a disbursement schedule for equal amounts of allowance at intervals throughout the year. A critical agreement needs to be made about whether or not your teen will have the ability to overspend from 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!
Teens are usually ready to assume responsibility for more of their own personal spending and to receive their allowance electronically. Establishing annual amounts (“buckets”) for broad categories of spending such as clothing, meals outside the home and team fees can go a long way towards giving your child experience with the crowding-out effect of bad decisions…spend too much on clothes and you can’t go to that concert with your friends.
One of our favorite graphics illustrating the power of crowding-out can be found in a FamZoo Blog Post from 2010 addressing the issue of how much clothing allowance to give Teens. It clearly illustrates how more money spent on Prom clothes automatically translates into less money for Back-to-School clothes. Our Gift Surveys actually have a separate category for special occasion dressing as families have told us what a stressful event prom dress shopping in particular can be. In less than two minutes, your Teen can calculate and compare the cost per use of a special occasion article of clothing to an everyday item. 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 one that can be worn to more than one event.
Teens are ready for virtual allowance distribution, via automatic bank deposits or other tools such as those that FamZoo provides. Online billing and payments are increasingly becoming the norm, so some experience executing them safely before going off to college can also be helpful.
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 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 as a way of helping 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 when they still live with you is the surest path to having to provide them with “Economic Outpatient Care*” when they become adults.
Consider making Gift Surveys a requirement for any expenditure in excess of an agreed-upon dollar amount. Gift Surveys were specifically designed to ensure that kids only ask for – or purchase – what they will really use and appreciate; they are a tool for parents to give their kids the best gift ever – the habit of thinking before buying. 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 any 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 a lot of back and forth Kim’s parents co-signed a loan to replace the spent funds which allowed her to return to school. Gift Surveys might have prevented Kim from over-spending in the first place!
*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 wellbeing on the part of both the giver and receiver.