Allowance, Saving, and Debt: Money Matters for Kids

Allowance, Saving, and Debt: Money Matters for Kids

Daddy, can I get a loan?

Our 8 year old just got herself out of debt.

On receiving her first weekly allowance since returning home from our summer holiday, she paid off the loan she had taken out while we were visiting Disneyland in July.

Loan? Disneyland? Huh?

Isn’t Disneyland supposed to be a fun place where kids immerse themselves in a world of fantasy?

Of course it is.

But Disneyland is also the epitome of consumerism, where the entrance fee is sky-high, the food expensive, and the souvenir shopping “opportunities” perfectly designed to feed off all the excitement.

And thus if there ever was a destination ripe for a lesson in personal finance, it is Disneyland.

Now, you may ask how an 8 year old gets into debt in the first place…

Daddy, How Do You Buy Something If You Don’t Have Enough Money?

It was our final day at Disneyland, and we had just enjoyed the thrill of the Pirates of Caribbean ride one last time. As with all the popular rides at Disneyland, the exit of the ride spits you out through the gift shop, a barely navigable maze of tight, winding aisles designed to get you and your kids as close as possible to all the sparkly consumer goods.

So far during our 3 days at the park, we had managed to do a commendable job of avoiding gift shops.

Yes, our older daughter had spent some time admiring some of the Disney character dolls and such, but we had told her in no uncertain terms on day one that we weren’t here to do any shopping. Mommy and Daddy had spent enough on this trip, so if she wanted to buy something, then she would have to use her own money.

So there we were on the way out of the ride when our daughter asked if she could stop and have a bit of a look.  Caught off-guard in a moment when my better judgement was blinded by adrenalin afterglow, I agreed.

It turned out to be a great decision.

After we had enjoyed a couple of sword fights with some of the pirate paraphernalia, our daughter gravitated toward the character dolls. She was particularly interested in a Rapunzel doll, which I must admit had a sweet, innocent smile and wide, alluring eyes (given that we are talking about Rapunzel here, need I mention her gorgeous hair?).

She asked how much it was.

“25 Euros.”

“How much is that in UAE Dirhams?” A quick calculation and we had the figure.

“How much do I have in my savings from my allowance?”

“About half that. You just spent most of it on books a few weeks ago.”

“Oh.” Her eyes dropped to stare at the floor for a few seconds.

Then came the question:

“Daddy, how do you buy something if you don’t have enough money?”

Bing, Bing, Bing!

I sensed an incredible learning opportunity transpiring right here in fantasy central. This pirate ride was going to result in some hidden treasure.

“You have to take a loan. But normally it’s not good to take a loan for consumer goods. However, this is a unique occasion, isn’t it?”

“What’s a loan?”

“Well, it’s money that someone, usually a bank, gives you for a specific period of time. But you have to pay interest, which is what you pay the bank for lending you the money.”

“How much is interest?”

“About 2% per month. This is consumer credit, so rates are high. However, if you pay it all off when the monthly credit card bill comes, you get to borrow the money for free.”

“And you’re lucky because you have enough savings for a down-payment. If you didn’t have anything, I wouldn’t be able to give you a loan.”

She thought carefully for a few moments.

“Daddy, I don’t want to buy anything else this whole trip. I only want Rapunzel. Can I get a loan?”

I gave her the loan.

And she didn’t stop smiling the rest of the day. Rapunzel barely left her side the whole trip. She carried her around everywhere, slept with her, and even let her little sister hug her every once in a while. Now that we are home, she sleeps with her every night.

There was certainly no post-purchase dissonance with Rapunzel.

Teach Your Kids To Respect The Value Of Money

Isn’t it mean to make your kid pay for her own doll at Disneyland and to go into debt for it to boot???

Absolutely not.

What it does is teach that child the value of money.

Our daughter has been learning the power and value of money for around a year now, ever since she came home and asked about getting an allowance.

She had heard some friends at school talking about getting an allowance and came home asking if she could get one too.

It seemed a reasonable request. I received an allowance when I was a kid.

After discussing the issue with my wife and reading a few articles like this one on the Psychology Today website on the different approaches to giving allowances to kids, we decided to go ahead with the idea.

But it wouldn’t just come for free. We are firmly in the camp that believes that money doesn’t just appear out of nowhere, and it should be tied to some type of effort.

And so in one of my brainwaves, I came up with the idea that she could clean up the mess in the play area (most of our main living area at the moment, with a 2 year old in the house) at the end of each day. It was something that was taking me around 10 minutes each night and was starting to drive me nuts.

Our daughter heartily agreed. The allowance wouldn’t be a huge amount (around $5/week), but it was more than she was already getting (nothing!).

She also agreed to the stipulation that this work was not optional. She couldn’t decide one week not to clean up and forfeit her allowance. She was making a commitment, and the work had to be done with or without an allowance.

The Benefits Of Giving The Kid An Allowance

Looking back over the past several months, I can see so many benefits of giving our daughter an allowance, many of which I did not anticipate:

  1. She is motivated to work, as she sees that work can result in benefits. While, like the rest of us, some days she is tired and would rather not do the work, 95% of the time she does it with verve and enthusiasm.
  2. She thinks carefully about the merits of each purchase. She talks of items being “too expensive” or “quite cheap”. She weighs the value of many small purchases or saving to buy something more valuable. We often discuss this together.
  3. She makes future spending decisions and saves to make them a reality.
  4. She respects her purchases by taking great care of them. She knows that if she loses or breaks them, she will have to work to get another one.
  5. It has taken the pressure off us. Whenever she wants to make an incidental, non-essential purchase, we tell her that she can buy it with her allowance. The result is that she never asks us for money.

Finally, our daughter has learned about debt. This wouldn’t have occurred if she didn’t have an income.

She has learned that there is a cost to debt, and that it can be high.

She has learned that carrying debt gets in the way of future financial decisions (she couldn’t even entertain the idea of her next purchase until paying her debt off).

She has learned the advantages of paying debt off as fast as possible.

And boy did she pay that Rapunzel debt off as fast as she could.

In Europe, she saved the money that friends gave her along the way. True to her word, she didn’t buy anything else for the next 7 weeks. By the time our holiday ended, she only needed one week’s allowance to pay the final installment.

Disclosure

I have to admit that it wasn’t only our daughter who enjoyed Rapunzel all summer long.

On the days when we spent long hours in the car driving to our next destination, I could always look into the back seat and see Rapunzel gazing back at me from my daughter’s lap with those innocent eyes and the latest hairstyle that my daughter had given her.

Seeing my daughter so happy with Rapunzel was the source of peace and serenity that I needed to navigate our car safely over 9000km around Europe.

It made me glad to be the co-CEO of the Bank of Mom and Dad. 😎

How about you? Do you have any tips on teaching our kids financial responsibility? Or maybe you’re against allowances and have a different philosophy on the subject. Share your thoughts and wisdom with our community by posting in the comments box below.

Comments

  1. This is a great post, Scott! With credit as easily available as it is, and with debt ubiquitous, teaching a young child about money and loans and responsibility and the value of work is a very sensible thing to do. Kudos!

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