Why Rich People Tax Their Children's Allowance

Written By:
Haley Sacks
(aka Mrs. Dow Jones)

Mrs. Dow Jones here, your go-to Zillennial Finance Expert, with a game-changing generational wealth tip that the 1% doesn't want you to miss: tax your child's allowance.

The Allowance Dilemma

Now, we all know that about 75% of parents give their children allowances for doing chores. It's a classic way to teach them about money and the value of a dollar. But what most people miss is the opportunity to level up this financial education by introducing the concept of taxes.

The Real-World Money Lesson

In the real world, when you earn money, you don't get to keep it all. A chunk is taken out for taxes before you even see it. So, why not replicate this real-world scenario with your child's allowance?

Here's the Plan:

  1. Tax a Portion: Deduct a percentage of their allowance as "taxes."
  2. Invest a Percentage: Teach them the importance of investing by encouraging them to put a portion of their allowance into a custodial brokerage with a low-cost index fund.
  3. Family Goals: Use the taxed amount for household goals. Maybe it's a trampoline, an air fryer, or any exciting family purchase. Let them be part of the decision-making process.
  4. Increase Allowance Tax: As your child grows and their allowance increases, consider raising their allowance tax rate. This introduces them to the concept of tax rates and brackets.

Why Tax Your Child's Allowance?

1. Real-World Simulation: By taxing their allowance, children learn that they don't get to spend all the money they make—a crucial lesson for future financial success.

2. Contribution to the Household: This mini-tax system helps them understand that they contribute to the household and reap benefits collectively.

3. Fun Family Goals: Deciding on family purchases using the taxed amount makes the lesson more engaging. A new swing set? A puppy? The options are endless.

4. Learning About Tax Rates: As their allowance increases, incrementally increase their tax rate. This teaches them about progressive tax systems and sets them apart in financial education.

So, should you be taxing your child's allowance? Absolutely! This unconventional yet effective approach not only imparts crucial financial lessons but also makes learning about taxes surprisingly fun. Join me in breaking the mold, teaching financial literacy, and unlocking generational wealth.

Will you be taxing your child's allowance? Share your thoughts in the comments below and stay rich on your journey to building generational wealth! 💰✨