One of the first money management principles we learn as young adults (and even as kids) is budgeting.
We learn from an early age that we cannot simply just spend all of our money willy-nilly, but we must instead allocate our money across a few different areas – spending money for needs, money for “wants” and money to go towards our savings/debt. This way, we have cash available to spend both on needs and wants (“spending money”), as well as monetary resources that we put aside to accumulate or pay off debt (“saving/debt money”).
How early did you learn this money lesson as a child?
We want to help your child learn that lesson even earlier than you did by discussing, in today’s blog, the best way to divide your child’s allowance between these three crucial categories.
Let’s go.
In adulthood, there are many different ways we are shown as plausible ways to allocate our money and honestly, any of these divisions (70/20/10, 60/30/10) can work well for us depending on how we manage to abide by those limits and restrictions.
Our personal favourite, though, and arguably the most popular rule for allocating finances in adulthood is 50/30/20 by U.S. Senator Elizabeth Warren in her 2005 book called “All Your Worth: The Ultimate Lifetime Money Plan”.
Yes, we know that we just mentioned “adulthood” twice in as many paragraphs, but that is actually in direct service of the point we are trying to make.
Since the “50/30/20 rule” – which is a financial allocation split that puts 50% of post-tax income towards spending for needs, 30% towards spending on wants and 20% towards savings – is the most common or popular rule amongst adults, we feel that starting your children off with the same allocation for their allowance is a good way to begin building that money habit from an early age.
To reiterate, our primary point here is that the 50/30/20 rule is the best way to divide your child’s allowance because it best represents a realistic and safe split of their money for when they become adults. Made popular by U.S. Senator Elizabeth Warren in her 2005 book titled “All Your Worth: The Ultimate Lifetime Money Plan”, this rule is also one that most people use to separate their money into different groups. Then, again, if you start building this money habit with your child’s allowance – say, at age 8 – they will be more likely to learn and maintain the habit of financial resource allocation as they grow older at 18, 28, 38 years of age and beyond.
In other words, the key to this conversation about using a financial allocation system typically reserved for adulthood starting from a young age is centered around finding a way to establish money-handling habits from an early point in your child’s life, which they will hopefully carry into their future as financially responsible grown ups.
Did you find the tips in this blog useful?
To take your child’s financial literacy to the next level, we encourage you to look beyond the words on this page and sign them up for one of our many world-renowned personal finance courses.
In these courses, we teach children in grades one through twelve about everything to do with money from its history and the basics to more complex material such as saving money, budgeting and doing taxes – depending on their age level.
Visit our website today and register now!
We hope to see you soon!