Two months ago I saw an idea at “get rich slowly” about using an allowance to teach kids the value of investment, saving, and frugality and have been applying my (modified) take on it with my eldest daughter for the last two months.
My eldest gets an allowance of Rp20,000 (About US$2) per week in Rp5,000 denominations as well as occasional extra money from the tooth fairy, family members, or her own small business* (more on this in another post). On her bedroom table, she has four jars labeled “Spending”, “Saving”, “When I’m old”, and “Charity” and she decides every “payday” where to allocate her income.
“Spending” is for any items she wants on a day-to-day basis; ice cream, play jewelry and things like that.
“Saving” is for a specific large item that will cost more than one week’s allowance. Once it is in the savings jar, she is discouraged from moving it to the spending jar until she has enough saved for the big item. She has just emptied her savings jar after two months of solid saving for a hamster complete with cage, bedding, wheel, and food.
“When I’m Old” is for when she is an old lady and can no longer work to earn money. A little early to be thinking about that perhaps, but it is worthwhile getting her into the habit of long term investment.
“Charity” is for worthy causes that she sees. Living in Indonesia, she is often confronted with examples of poverty that would seem pretty extreme in the west and she sometimes wants to donate.
The most worthwhile part of this experiment has been the way that important finance concepts have sprung up naturally – I had this conversation with her after she had been saving for her hamster for just one month and had grown impatient.
Eldest: Dad, can I borrow the last Rp80,000 for the hamster now?
Me: I guess so. But if you borrow money, you have to pay interest.
Eldest: Okay, great! (Suspicious pause) What’s interest?
Me: It means that if you borrow Rp80,000, you have to pay me back Rp90,000. The extra Rp10,000 is like a fee for me lending you the money. You can pay me back from your next five week’s allowance.
Eldest: No Way!
Of course, I made the interest extremely high and deliberately phrased it in negative terms so that she would turn it down but I can work towards more subtle credit offers in the future as she gets older.
My next step will be to offer her a variety of investment options for her “When I’m Old” jar – perhaps attached to companies she knows and likes. I’ll keep you posted as things progress…