I like the basic idea, but I would modify some of the particulars, and I would DO IT GRADUALLY because I think that's less apt to result in really horrible mistakes (the tone of the OP bothers me; sounds like she enjoyed seeing her daughter suffer) while still teaching financial responsibility. For example: This year, she pays for all her entertainment and non-essentials such as make-up. Next year, she pays for all her clothes. The year after that, she pays for all food eaten outside the home. Senior year, she pays for everything not shared by the family.
I would not charge her for chores neglected, for 3 reasons: She might decide not to do them because "I don't need the money right now," it encourages her to think of family life as nothing but a set of economic transactions, and she might start charging ME when I go to bed exhausted with dishes left unwashed! Instead, I would continue to expect her to do certain chores because she is a member of the household (of course, she would've been doing some chores since age 4 or so) and offer money for occasional really major tasks.
I would never implement such a system without sitting down w/her and discussing the agreement. "You're going to take more responsibility for finances" would be non-negotiable, but which things she'd be responsible for and how much money I'd give her would be mutually agreed. She's unlikely to cooperate otherwise.
Another good idea is to have her keep a list of what she buys and for how much. Not only does this enable her to see where her money is going, but if she feels the budget is too small it gives her genuine evidence to negotiate with!
Irishmommy, your eldest is too young for this idea in full, but she's not too young to have a bank account and be responsible for a small portion of her budget. One of my friends had a checking account at 7 and was responsible for writing the checks for her ballet lessons and school lunch, for instance.
Mama to a boy EnviroKid
10 years old and a little girl EnviroBaby
I write about parenting, environment, cooking, and more.