Never, I repeat, never pay your kids an allowance. Instead of grooming your kids with a "Fixed-Income Mentality", rather ignite their entrepreneurial spirit. In the same token, kids should be kids and enjoy a childhood where they are not burdened with unnecessary responsibility and the stresses of "making-ends-meet". There is a fine line between giving your kid the awareness and tools to navigate adulthood vs dumping heavy traumatic financial problems onto them. Know when and where to draw the line.
In South Africa, we have unfortunately inherited a society where most kids are already playing a role in being breadwinners. This #5 step approach may or may not be applicable to everyone.
#1 You get out, what you put in
Kids should have chores. They need to feed the dog, set their beds, put their toys away and complete their homework on time. Kids need, wait... Kids want discipline. They yearn for it: To feel they are needed and contribute value to a household. It give some meaning to their existence and provides an opportunity for parents to show recognition.
What you'll want to do, though, is give them an opportunity to fill a list of, say 5 to 10 things they can do to earn an income. It can also include his own business ideas, like selling second hand books or tutoring the smaller kids. Review and approve the list. Then apply a ranking from highest to lowest and create a rate card. Your kid is now a freelancer! He or she can chose to wash the car, mow the lawn, spring clean the garage, fix broken furniture or anything that comes to mind and know that the effort will match the reward.
#2 If you do not ask, you do not get
For the freelance list above, when in the negotiation phase you could try low balling them. If they know that you pay the gardener R200 for the garden service, offer them R30. They will have an allergic reaction to a low ball offer.
This gives them the opportunity to negotiate. Be elaborate in explaining that you low balled them with the intention to engage in negotiation. The lesson they should take from this is that they have the power to improve their position if they just ask!
#3 All the way to the bank
Take your kid to the bank and get them to fill out all the forms and open their own bank account. Nothing gives them more pride than receiving their first ever bank card. Yeah, you know what I'm talking about! Reward them a small amount, 50 bucks, and walk them through the process of depositing this money into their account. If your child is old enough to surf the internet, gift them the lesson of online banking. Explain that banks pay monthly interest and charge monthly fees and that the reason for the bank account is to allow them to track their balance as they embark on this 5 step journey with you.
#4 Pay your debts or face the consequences
There may be an amazing opportunity where your child requires a small lump sum, for say a new iPad or Xbox. Grab this opportunity. Sit them down and explain to them that they has not earned or saved enough just yet from the freelance work and that they are deciding to get into debt. Let them make the decision on whether it is worth it or not. They will obviously pick the instant gratification route and go "Hell yeah!".
Draft a small agreement and get them to sign. Make sure you include Interest Terms and explain this concept to them. They will undoubtedly take this lesson with them for the rest of their lives: Interest is the price you pay for instant gratification. Take this seriously. The agreement should stipulate the repayment terms and default terms. Default terms should include confiscation of the said item. Explain that this is how buying cars and houses work. Teach then discipline to manage debt. Tough love, I know, but hey... they will thank you one day. This is all coming from a place of love.
#5 It's not what you earn, it's how much you keep & invest
Your kid might be blowing the lights out with his earnings. Good for him/her. Now comes the big lesson: It is not what you earn, it's what you keep that matters. Then turn it up. It's not what you keep that matters, it's how you invest it that divides the rich from the poor.
Give your kid the opportunity to grow his nest-egg (and learn real-world economics and finance rules):
- Offer to double whatever he can save for a year (explain that this is how money market accounts work, although the banks pay lower than your 100% interest!)
- Offer to sell him an allowance in perpetuity for his lump sum saved (explain that this is how retirement annuities and pension funds work)
- Offer a savings target so out of reach that if your kid achieves it, he/she could get a car at 18 (This one will really ignite flames in his/her heart strings and allow the entrepreneur within to break free)
- Offer to sell him a percentage of your investment property (this is how he/she can earn rentals)