When I was five years old, my parents started to give me an allowance. My eyes lit up- I could now conquer the world. I had at my disposal the power to buy off anyone, to have my way, to own all the toys that Thornbury’s (yes, Thornbury’s in the Fayette Mall, for all of you Lexington folks who remember back that far) had to offer.
My plans for world domination came to a screeching halt when I learned that my parents had one simple rule to govern my massive fifty cents a week allowance. This one simple rule is one that they enforced over the course of the next thirteen years, and one that I continue to practice today and even make my own children follow.
The rule was the Rule of the Financial Floor.
My parents are extremely fiscally responsible. They saw the folly of living paycheck to paycheck, and therefore they wisely built margins into their financial outlook. They forced me to do the same thing.
Starting at age five, they set a $2 “financial floor” that I was not allowed to go under. If I wanted a toy that cost $5, I had to have $7 before I could buy it. At no time and under no circumstance was I ever allowed to have less than $2 in my possession.
As I got older, the floor increased. By the time I got to high school, the floor was $200. I remember very vividly the time that all my friends were going to see a movie (which cost $5 back in those days), and I had $204 in my bank. Guess what? I didn’t go see the movie.
I would recommend that all parents teach their children the concept of the financial floor. They need to know how unwise it is to ever spend your last dollar. They need to know that wise people build margins into their lifestyles so that they are never caught unaware. Parents, begin now- it doesn’t matter what age your children are.
I asked my dad why they established $2 for me when we started. He said, “Your mom and I figured that a good starting point for a floor was one month’s income. You got $.50 per week, so $2 was one month’s income. That’s a good starting point.”
Parents, your child lives in your house, and therefore lives under your rules. Whatever your child earns, whether from a job or from allowance, establish the floor at one month’s income. You might even want to establish that for yourself as an example. Then, periodically check to see if your children are abiding by that rule.
At a moment’s notice, they must be able to produce the amount of one month’s income. This will give them real-life experience, because in life, they will be faced with sudden medical bills, an HVAC unit that goes out, or the sudden need to buy another car when their car dies. If they have been living by the rule of the financial floor, they will be in a much better position to handle whatever life throws at them.
This isn’t a concept that kids will figure out for themselves. It will take parental teaching to make it happen. By following this one rule, you will set your children up for success- financial success- later in life. Do it now.