Countless studies have shown that kids with a strong financial education grow into financially responsible adults. One of the best ways to teach your children some of the most crucial financial lessons in life is to let them manage their own money. That’s where a weekly allowance comes in.
Giving your kids a regular allowance can become a thorough education for them. There are, however, a lot of mistakes parents make that prevent a weekly allowance from being the great experience it can be. Use these five tips to turn an allowance into a full-blown finance class.
Decide on an Amount
There are a lot of ways to decide how much of an allowance you’ll give your children. Some parents follow the rule of $1 for each year of age—e.g., a 10-year-old would get $10 per week. Increasing their allowance with age makes sense because a teenager will have more wants and needs than a five-year-old. It’s hard to teach a 13-year-old good money lessons with just a few dollars a week.
Another way to decide how much to give your children is to find out how much they can expect to spend in total for a specific purpose, and then divide the payment into equal installments. For example, if you know your child spends mostly on snacks at school and in-app purchases on a mobile game they love, you could give them a periodic allowance that add up to the total amount and that, if managed correctly (see tip #3), would help them cover their spending.
Of course, your own financial situation plays a big role in the amount you’ll feel comfortable giving your child. Whatever amount you choose, however, it’s important to be consistent in your delivery.
Start Them Young (Younger than You Think)
According to a survey by T. Rowe Price, when respondents were asked, “How old do you think kids should be when you start giving them an allowance?” the average age given was eight years old. But some child development experts argue that children can start learning key money lessons by the time they’re in preschool.
For example, personal finance expert Ron Lieber wrote that by the time your kids start asking you about money, they’re likely old enough to distinguish between wants and needs. This is the perfect time to start giving them money of their own to manage (with your help, of course).
Use the Allowance to Teach Children about Goal Setting and Budgeting
Saving money for money’s sake is rarely anyone’s aim—we save money because we want to reach our life goals—whether it’s a car, house, or gadget we’ve had our eyes on. Even early on, kids will have their own goals.
Using their allowance, teach your children how to think about their long- and short-term goals. How can they save a portion of their allowance each week to reach their goals in a given timeframe? What will they have to give up in the short term to reach those future goals? What will the consequences be if they think too much about the present and not the future?
Understanding the idea of short-term sacrifice for long-term gain is a key financial lesson that will serve your kids well later on in life.
Make Them an Active Participant in Managing Their Own Money
You can’t expect your children to learn anything if you simply hand them some money and leave them to their own devices. Each week, when you give your kids their allowance, help them make a plan to manage their money.
One of the more popular ways to do this is the three-jar system. For this, you take three jars and label them “saving,” “spending,” and “donating.” The money in each jar goes to the labeled purpose, and helps children visually manage their money by deciding how much to devote to each jar. It’s important to tie this into goal setting and budgeting as well.
As your kids get older, you can give them more challenging money management tasks. For example, say you normally set aside $100 for new sports equipment for one of your children each year. Rather than buying everything for them, let them figure out what’s worth buying new, and what’s worth using for another season. Something like this would also be a great way to show kids how to shop for value, not just big name brands.
Separate Chores from Allowance
One of the most common mistakes parents make is requiring children to complete a list of chores before they can have their allowance. The problem with this approach is that it doesn’t teach kids that chores are part of being a family, not just drudgery that needs to be rewarded. Basic tasks like cleaning their rooms and vacuuming the house should be their expected contributions to the household.
Whatever you give your child for an allowance, make sure they know that it’s not a reward for doing chores. As we’ve said, an allowance is primarily a financial learning tool – you don’t want them learning the wrong lessons from it. If you really want to reward your children for helping out, do it only when they go far above and beyond what’s expected of them.
Establishing an allowance for your children can be one of the best ways to teach them a variety of financial lessons that will last them a lifetime. By following these tips, you’ll ensure that they learn these lessons the right way, and at a pace that will follow the path of their own personal development.