Allowances, the Zoo, and Marshmallows – Foundations for Financial Success

After carefully examining all of the options, the missus and I were ready to execute on our 7 year old’s allowance.

We decided to “Pay Allowance for a Wider Role / Increased Responsibilities”. The steady stream would allow my son to get used to managing money and hopefully hit our top objectives of teaching saving, discipline, and deferred gratification. I didn’t want to get beat down with a la carte chores out of the gate, but we’re definitely going to add that down the road.

The gritty details:

• Amount: $2 / week. Yes, it’s low. I’ve seen a lot of recommendations closer to $1 per year of life per week. But our thoughts:
  • Starting low gives flexibility – we’re free to go up, but you definitely don’t want it too high out of the gate
  • What better way to teach about scarcity and tradeoffs?
  • It’s guaranteed to be way lower than some of his peers (the local Tooth Fairy has given $20 per tooth); this is great for him to learn that though he may “earn” less than others, by saving and prioritizing, he can be just as (or more) happy.
• Timing: weekly – I’d love to go monthly, but I feel the interval should be meaningful to the recipient, and a week is the longest measure of time my 7 y.o. really grasps right now.
• In return for: a list of responsibilities – some specific (e.g., cleaning) and some more high-level civic duties

With an eye to flexibility, I wanted to be able to change things as needed, but I also wanted to give him trust in the deal. He should view his allowance as a financial force to control, rather than something arbitrary and random.

So what better way to formally document the arrangement, than a contract?

Some (including the missus, but she humored me) may think I’m a little strange to execute a contract for my 7 year old’s allowance. Guilty as charged.

But after doing it, I can highly recommend – my son seemed to enjoy it (could just be my DNA at work…), it reinforced the seriousness of the event and our mutual obligations, and it certainly didn’t do any harm.

My Son’s First Contract

I drew up the deal, signed with a flourish, and told my son to sign – as he poised with his pen ready, I told him to stop. “Never sign something you haven’t read or don’t understand!” That lesson alone, if it sticks, is worth thousands. And it’s not just a lesson for kids…

So he looked through it, laid his pen down, and said, “I don’t know what this means”. He looked up, a little worried to refuse, but he saw me smiling and knew he had done right.

I walked him through the document and explained everything to his satisfaction, and we signed.

I handed him a new wallet (a totally boss camo number with a dollar inside*), his original of the contract (of course I did it in duplicate – what kind of show do you think I’m running here?), and his first $2 allowance. Making it a bit of a ceremony told him something important had happened and he was entering into a more serious world. It had the desired effect: his contract, his wallet, and his financial log are enshrined with his most hallowed Lego sets.

How Is He Doing?

• Frugal Saver   My son has not spent a penny yet. He has a Lego set that he wants, but it costs ~$30, close to his net worth. When I told him he’d have no money left, he looked quite concerned and said, “Then I need to save at least $80, so when I buy it I still have dollars.” He couldn’t tell me how many he’d have left, but we’ll prioritize saving over math for now.
• Good Money Manager   He is tracking every penny inflow religiously, and he seems to be fully connecting the figures in his little book with the money in his wallet.
• Old School   He’s refusing to let me put any money in “the bank” (I was going to provide him a 10% or so interest rate so he could become exposed to the most powerful force in the universe) because “bad guys rob banks”. Both my and the FDIC’s guarantees are worthless to him. He did start to seriously consider it after Warren Buffett told him it was a good idea on the Secret Millionaires Club, but even Buffett’s sway has its limits.
• Shady   He’s started to be quite secretive with his books and records. While he keeps his wallet out for all to see, he won’t let me see exactly where he stores his little financial log – I have to close my eyes while he retrieves it. I don’t know if this is good or bad, but it is fascinating.
• Model Citizen   He’s kept up his duties extremely well – help around the house is instant, and things (piano practice) that might have brought some bellyaching before are now done no fuss.

Overall I’d say he’s doing great. So perhaps it’s safe to conclude that with a little thought I have hit on a brilliant solution, I win the global competition for the world’s best allowance model, and every parent should immediately follow my lead. After all, it seems like the masses are doing a pretty poor job of it.

But unfortunately, it’s not that simple. There’s something deeper at work, and my attempt for a controlled experiment, like any such attempt with kids, was compromised from the start. A single statement he made told me his financial discipline had already been long in the making.

Financial Discipline, Courtesy of the Zoo

When I was having our money talk, I stressed how important it would be for him to save money, be careful with spending, prepare for a rainy day, etc. etc.

His answer: “I know – just like at the zoo, right?”

Huh? Just before I unleashed with “What? No! We’re talking about money here, son”, the little 15 watt in my head started to flicker, and I got it. Some background is in order.

Our local zoo has an excellent program where you can find things in nature, take them in to the “nature exchange”, discuss and learn, and then get points. You get to use those points to trade for much cooler items on the shelves: fossils and rocks at the low end, complete skeletons, geodes, and other treasures at the high end.

My son started doing the nature exchange when he was 4. On his first trip, he was given some points and was ready to blow them all shopping, so I went into crisis mode. “Why don’t you save up some points, so you’ll have more next time? It’s a really good idea to save.” Once he knew there was a next time, he got it and realized he could get much better items if he saved and waited. Plus 4 year old boys think dad knows everything.

Well, nowadays his balance is enough to clear out wide sections of the nature exchange, and he still only buys a single shark tooth (this costs very few points, if you’re a little rusty on your nature exchange pricing) or just grabs one fossil from the free bin on each visit. Saving his points has become its own reward, and his point balance seems as tangible and rewarding a thing in his mind as one of the items he could buy. He was originally saving for the big-ticket items; now, he’s saving to save.

I hadn’t considered that my son’s habits for zoo points would instantly transfer to money, but they did. I think my allowance model is far less important than the habits he’s already  gained from the zoo.

Which brings up the question: why was I teaching my little 4 year old to be a skinflint with his zoo points in the first place? What kind of killjoy parent am I?

Marshmallows – the Greatest Investment in the Universe**

When I was prepping for our first child, I kept coming across references to Walter Mischel’s experiment on deferred gratification.

The experiment was pretty simple. Little kids (~4 y.o.) were given a marshmallow, or cookie, or other sweet. They could eat it immediately, but if they could wait 15 minutes, they’d get another for a total of two. Results were mixed: some gobbled away, but some were disciplined enough to wait and double the payout. Interesting, but not exactly earth-shattering science, right?

Things got real, though, when they followed up with these kids many years later. Turns out the ones who held out for the second treat did much better in life: higher test scores, better education, more successful, even healthier. The ability to delay gratification at such an early age was a strong signal for later life success.

This of course got my attention, and we’ve used this experiment to inspire the choices and rewards we’ve offered our son. Working and waiting for a reward (and even the double payout for a small wait) is standard, and instant gratification pretty much stopped for him a long time ago.

During the first nature exchange at the zoo, it was automatic for me to caution him to save, and it was automatic for him to recognize the familiar context and think hard about delaying gratification. But the zoo was more important because the points were truly a form of money, and his experience there has now spanned years.

Thanks to the zoo and Walter Mischel, my son already had developed some of the critical traits I thought would come from an allowance. While I have seen some benefits from our specific allowance model, my primary goals – teaching saving, money management, and delayed gratification – were already well advanced before his allowance ever began.

And Finally, My Point

So if I had to offer advice on bestowing excellent money habits to kids, which is where this all began, it would be this: teach delayed gratification in every form possible as soon as your kid can grasp the concept (3 y.o. or earlier). This will be a lot more important than how you model an allowance.

But since we’ve gotten under the hood a bit, I also offer on allowance design:

• Make the allowance an event   Both at inception (include a wallet / purse as a gift) and each payment, which should always be on time. Remind your child why they’re getting it, and what their obligations are.
• Financial tracking   Insist on it, assist with it. This is the best way to truly grasp (and get excited about) a growing pile. A simple notebook will do.
• Start low   You can always go up, but start too high and you’ve lost a lot of the learning opportunities.
• Document the deal   A simple contract helps both sides and avoids any ambiguity down the road. Plus contracts are fun.
• Be vigilant   Think through carefully the unintended consequences your allowance model may have. Don’t set it and forget it – watch how your child is doing with money, and provide advice and adjustments when warranted.

The financial discipline you teach your child can be one of the most valuable assets they ever have. An allowance – thoughtfully considered, carefully designed, and well executed – can be a very important part of the lesson. But whatever you do, focus on delayed gratification, and start early!

 

* You always have to include some money when you give a wallet or purse as a gift. I took this as common knowledge but have found some folks don’t know this – if you leave it empty, it’s fated to stay that way.

** I tried to calculate the annual return for something doubling every 15 minutes, but it broke Excel. I suspect it’s a rather large number.