When my son Ryan was seven and my daughter Lily was five, we implemented a household “pay for performance” program in lieu of an allowance. We charted simple, but meaningful chores that gave them an opportunity to contribute AND earn spending money - their first taste of the real world when it comes to making an income.
The three tier compensation system was simple but effective:
Tier 3: If you put your toys away, you got $ .50
Tier 2: If you folded laundry, you got $1
Tier 1: If you dusted the entire living room, you got $1.50.
My kids could decide how much they wanted to opt in or out. And you started off at Tier 3 chores to earn the right to make the big bucks at Tier 1.
Pay for performance worked beautifully the first two weeks. We all agreed that once both kids earned $5, we could go shopping, and as soon as they achieved that threshold, we embarked on a special Target run to see what goodies they could purchase with their newfound wealth.
After a few minutes of wandering, I watched my daughter stop and gush over an arts and crafts item that cost exactly $5. “That is so cool!” I agreed, and then I realized that Uncle Sam thought so too.
How was I going to play this?
I knelt down to my daughter’s eye level and took a deep breath. “Honey” I explained, “I’m so sorry, but you don’t have enough money for that item. It will be more than $5 with tax.” As I tried to communicate the concept of sales tax to my child, I watched her look of confusion transform into tears that started streaming down her crestfallen face. I suggested we find something with a lower price tag that she could afford, but she didn’t budge. She wanted that particular item or nothing else. So she left Target empty-handed, and in despair.
I second-guessed my decision the entire drive home. I mentally calculated the future potential expense of the therapy session Lily would need to work through this experience, and silently awarded myself “Crappiest Mom of the Year.”
But when we arrived home, a small victory happened. Lily walked straight to the chores chart hanging in the hallway and studied it for a minute, “Mommy,” she asked, “can I make more money today so that we can go back to Target?”
From that moment on, I have exposed my children to the day to day financial management of my household. They understand per unit pricing when we are in a grocery store and how to determine the better deal; they understand the concept of unhealthy debt; having a mortgage; the real estate market; the stock market; and taxes. They also understand the cost of a college education today. Now teenagers, they manage their own checking and savings accounts.
I also realize that now is the time to give them an opportunity to make financial choices that may come with consequences. Small mistakes today translate into early learning lessons that may prevent more costly mistakes in their adult lives.
As the daughter of a single mother who financially struggled, I learned money management very early in life, and passing that along to my children is a source of great pride for me. Starting at sixteen, I worked retail after school four days a week and began saving immediately. Since English was a second language for my immigrant mother, I managed the household finances. I wrote the checks to pay our bills, translated financial statements, and became her mouthpiece whenever money questions or negotiations were needed. And in college, I made the conscious decision to secure and study books on smart saving strategies to get educated on healthy financial fundamentals.
As a child, I was exposed to money management because of fear and necessity. Today, as a single parent, I am fortunate to empower and educate my children with life tools and practical applications which I hope will serve them in the future.
Just like investing in the stock market, we have to invest the time to start financial “master classing” at home with our loved ones, especially our children. Include them in your daily financial tasks and talk candidly about how you are planning for the future. And let this commitment to your loved ones inspire you to continue learning and growing towards your own financial goals.
Because here's the unfortunate reality: when it comes to creating a financial safety net and saving for retirement - Prada, Louis Vuitton, and Mercedes won’t be footing their bills.