How Much Allowance Should You Pay Your Teenager?

I bumped into an old friend this week at Starbucks, and he hit me with one of the all-time classic teen parenting questions:

Bill, how much allowance should I give my teenage son?

The short unhelpful answer: “it depends” — of course.

A longer, more helpful response? Here’s what I would suggest when it comes to allowance for a teen. (Note: I’m assuming it’s during the school year and your teen isn’t holding down an outside job. I’d recommend a job during the summer if possible and adjusting things accordingly):

• Decide on the rough categories of things you want your teen to be in charge of buying — weekday lunches? clothing? entertainment? I’d try to keep it pretty simple. Don’t boil the ocean here. If you make it too complicated, you’ll struggle to consistently follow through.
• Throw in a small amount for “random wants” — basically pocket change that your teen can blow on stupid stuff or, if motivated, squirrel away each week to save for that special item. Having to delay gratification and go through the extended act of saving is really key here. (See the famous marshmallow experiment.)
• Have your teen propose a simple high level budget for the above. Review it together and revise until it’s acceptable.
• Base your allowance amount on that budget.

The bottom line: comparing absolute allowance amounts with peers is pretty much meaningless. Families have wildly divergent expectations about what expenses their kids are responsible for covering and what constitutes a wise purchase given each family’s unique financial situation, money values, etc. That’s why I like the “budget-based-allowance” approach vs. the “but Johnny and Suzy get $X” whine-fest. Logical. Easy to explain. Easy to defend. Plus, when teens help come up with the budget, they feel ownership. They’re bought in. You’re virtually guaranteed to have less complaining and begging downstream in my experience.

Sometimes, it’s helpful to keep a few separate allowance buckets. For example, I had a separate use-it-or-lose it clothing allowance arrangement with my daughter. She couldn’t use clothing money for other stuff, but she could apply her entertainment budget to clothing if she wanted to. I also made her clothing allowance annual instead of monthly or weekly. I wanted her to wrestle with managing a large sum of money over an extended period of time. Experiment a bit, and try whatever tweaks make sense for your teens and family situation. Remember, you can always fine tune things over time, so don’t over analyze it.

Another thought: I’ve made several loans to the teens over the years for big ticket “needs” like a laptop. In the laptop case, the loan amount is for the delta between the most basic model and whatever fancy-pants, high end model they think they “absolutely must have.” I “garnish” their allowance to pay it back over a year or so. That way, they really appreciate how much those things cost as they see the payments going out each week and have to cut back on their other spending. The added bonus: they invariably take waaay better care of the things they buy that way. Again, it’s all about ownership and shared skin in the game.

A parting thought: for teens and college kids, prepaid cards are a really good option. I’ve been using prepaid cards with my 16 year old son for the last several months, and I’ve been very pleased with the results. There’s no worry about running up a debt like with a credit card. Prepaid cards are minimal hassle to get and low commitment relative to a full fledged checking account at a bank. All good things when it comes to dealing with the combustible mixture frontal-lobe challenged teens and money.

I’ll leave you with a list of teen prepaid cards to consider:

Teen Prepaid/Debit Cards

View more lists from FamZoo.com at FamZoo

Tips for Teaching Teens Responsible Credit Card Use

This is a guest post by Alanna Ritchie. Alanna is a content writer for Debt.org, where she writes about personal finance and little smart ways to spend (and save) money. Alanna has an English degree from Rollins College.

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Around 70 percent of college students have credit cards, and some of these kids begin their adult years of credit spending unsupervised and unprepared. The consequences can be devastating, as independence is then shrouded in a dark cloud of debt.

Instead of waiting until kids are out of the house, some parents choose to take advantage of the years where teens are developing spending habits by overseeing their credit education. Teens can either be an authorized user on a parent’s account — which can be closely monitored — or, if they have verifiable income, they can apply for their own cards.

Here are some steps to teach teens the proper use of credit as a tool:

1. Explain the fine print. As you introduce them to how credit cards work, make sure to include explanations about fees and interest rates. Understanding the ins and outs of interest rates and how these may change based on activity is critical.
2. Make a budget. Before getting the card, make sure that you both know what the money will be spent on and where the payments will come from. Then, when you get the bill, you can compare your goals with execution and adjust the plan for the next month if necessary. Track spending throughout the month, so that the bill doesn’t come as a surprise.
3. Discuss minimum payments. Make sure they understand the difference between the minimum payment and paying off the full balance every month.
4. Review the monthly bill together. Walking alongside your teen in this process will take more than a few conversations. After the first few bills come in the mail, it’s time to sit down together again. Together you and your teen can examine what is owed and how the money is being spent.
5. Have them pay it off every month. After you finish discussing the bill, it’s time to make payments. Instead of making only the minimum payment, teach teens to pay off the whole balance every month. Getting teens in the habit of doing this while they don’t have to carry the weight of expenses like rent, food and other bills, will prepare them to make the same choices in the future.
6. Keep balances below 25 percent of credit limit. Paying off the balance isn’t the only precaution your teen should take. Teach them how to maintain a good credit score by helping them understand credit utilization. If they have a credit limit of $500, for example, they should only use $125 of it each month.
7. Don’t rush into bailing them out. Instead of coming to the rescue when teens make impulse buys and accidentally overspend, discuss realistic options so that they can take care of their debts. This may mean working more hours at their jobs, holding back on spending until the balance is paid off, or — if your child demonstrates that they’re truly not ready to carry this responsibility — cutting the card up. (Too soon for a credit card? Consider a FamZoo prepaid card as safe, educational warm-up.)

Giving your teen the chance to manage their finances within the safety net of your household can be a valuable opportunity. The truth is that one day Mom and Dad’s rules will no longer matter. Credit card agreements will be the new set of rules, and it will be time for young adults to set some good rules for themselves.

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This was a guest post by Alanna Ritchie.

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