Economy

The new rule of thumb? Allow inflation

The new rule of thumb?  Allow inflation

Written by Chris Taylor

NEW YORK (Reuters) – If you’re feeling the effects of inflation, here’s some breaking news: your son is.

Allowances don’t go as far as they used to be.

In fact, average weekly allowances rose 3.55% during the first seven months of 2022, compared to the same period the previous year, according to data collected for Reuters by family finance app Greenlight. The average allowance is now $12.76 per week.

Most of the increase goes into the pockets of older children. From January 1 to July 29, 17-year-olds saw a spike to $19.80 per week. 18 to $22.53; and 19 years to $28.53, all of which are significant increases over the previous year.

Younger children tend to see their suits fixed, or even slightly lowered.

“After all, older kids tend to spend more in general, like buying restaurants,” says Tim Sheehan, co-founder and CEO of Greenlight. “Or they’re likely to spend on gas, if they’re 16 or older.”

Inflation is the obvious culprit here, as the price of everything seems to be going up. The annual inflation rate in August was 8.3% – down slightly from previous highs, but still eating away at parents’ salaries.

Which begs the question: How much inflation should parents account for in their decisions about the allowance, if any? Some thoughts from the experts:

Use it as a teachable moment

Whether you decide to increase your children’s benefits or not, higher prices across the board can certainly lead to some tough decisions about saving and spending – the kind of choices your children will have to make later in life.

It’s a teachable moment for Houston financial planner Jason McGraw and his two daughters, ages 10 and 12.

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โ€œWe are using this inflationary period to teach them how to make choices with the money they have,โ€ McGarough says. “Just because prices have gone up, that doesn’t mean you’ll get an automatic increase.”

Both daughters are making adjustments to their spending habits.

โ€œOne of them has shut down and is refusing to buy goods at inflated prices,โ€ McGarough says. “The other is still spending, but accepts that she can’t buy as much as she can last year.”

Allocate money in different buckets

If you’re giving your kids an inflation-related allowance, at least create responsible habits by making sure they don’t all go into more spending.

Financial planner Lori Allen of Manhattan Beach, Calif. uses Greenlight to split her daughter’s allocations into 30% for spending, 50% for saving, and 20% for giving.

So while $20 a week might sound great, “her fun money is only $6 a week, which I think is just right for a 10-year-old in the fifth grade,” Allen said.

Increase your chances of profit

It’s a recent fact that for someone in their late teens, $15 or $20 wouldn’t extend very far these days. So consider giving your kids the opportunity to earn more money with “one-off” business projects that might fall outside of their usual routine tasks, says Greenlight’s Sheehan.

After all, the 3.5% year-over-year increase in provisions does not actually reflect the full scope of all the inflationary pressures out there. “So it might give parents extra jobs outside of their allowance, in order to make up for inflation,” he says. “I think there’s a lot of that going on.”

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Stick to the rules of thumb

Throwing a lot of money at the inflation problem is probably not a great thing, in terms of creating smart kids out of money. But it is only natural that as they get older, they will need more pocket money than they did when they were younger. So one general rule of thumb is to have benefits appropriate to the child’s age, Sheehan suggests โ€” a 12-year-old might get $12 a week, for example.

In this way, every year is an exciting event that enhances their income and helps them meet the increasing costs.

โ€œOur sonโ€™s allowances go up every year on his birthday, which gives him more responsibility every year,โ€ says Mitchell Krause, a financial planner in Santa Monica, California. “Over the years, he’s seen the cost of things rise and he’s had to figure out the best way to spend his money.”

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