Once my son and daughter turn 18 (or 21), I will stop paying them allowances.

It’s not that they were bad, or that I will have a sudden change of heart with the matter, it’s just that they’ll be adults then and traditionally that’s when such things stop.  But in ways isn’t this almost like a punishment for becoming an adult?  Perhaps at some subconscious level, it deters kids from wanting to strive out on their own, becoming totally financially independent from their parents?

After talking this over with my son last night, we decided to change the way that he receives his allowance.  While the details are still being ironed out, basically we going to take most of his money from his saving account and invest that amount into one or more dividend paying stocks.  The idea is that I will still pay him an allowance, but the dividend from these stocks and a portion of the money from his allowance will go into buying more stocks (along with Christmas & Birthday money along with any earned money that he might receive).  We are still working out the details, but the idea is that if we do it right, we should be able to accumulate enough stocks that pay a dividend to provide him a passive dividend stream when he turns twenty-one.  Ideally the amount would be at least $21 per week, which would match the current allowance program that I have my kids on.  Of course, I’m hoping for a higher amount to offset taxes, but who knows, only time will tell.

So what are the benefits of such a Dividend Allowance Paying program?

1. My kids continue to receive an allowance, but instead of me paying for it out of my earned income, they will pay themselves via the passive income received from dividends.  This is one of those “the gift that keeps giving” kind of ideas.
2. They start to learn about investments and the power of dividends and passive income at an early age.  Hearing about passive income and actually receiving passive income are two different things entirely.  Until you have passive income, it’s just a money myth.
3. They will be able to gain investment experience, learning that stock prices go up and down with time, and experiencing recessions.
4. The learn the concept of having your money work for you.  This will help them visualize money as a tool.
5. I may gain kids that can talk to me about stocks, we will grow closer as we will have more in common.

Of course I can always follow a different path and invest in dividend yielding mutual funds too.  But since I not that crazy about the fund fees, for now I think I’m going to stick to individual dividend stocks in the short-term.

I really like this idea and one that I’m excited about along with my son (my daughter’s to young to get excited about it yet).

Bests,

MR