The lessons you teach your children about money will stay with them for their entire life. What you teach them, and what you don’t teach them, can affect them well into adulthood. Do you know any adults that handle their money poorly? Are you an adult that handles your money poorly? Actions speak louder than words, and your children are paying attention.
As parents, my wife and I have made a very conscious effort to educate our kids about money: what it is, what it does and where it is on the list of important things in life. We struggled as much as any other parents do when trying to impart life lessons, but ultimately, we found that simply talking about money with our children and explaining things as we go worked for us. Our two children, by either nature or by the sheer will of frustration, have very different personalities. One is serious and likes to plan; the other is a fly-by-the-seat-of-your-pants kind of kid and can be very indecisive. One thing that links them with everyone else in the modern world is the epidemic of buy it now, instant download, immediate gratification. Adults and children alike are incredibly susceptible to falling into the trap of impatience.
Allowances are generally how children first learn about money and there are as many opinions on allowances as there are children in the world. We had the same questions when we started out:
How much should I give my child per week?
Should allowance be tied to chores or school performance? What about behavior?
How should they spend (or not spend) what they earn?
How do we decide the amount for different children of different ages?
Many financial experts have come up with the guideline of “one dollar per year of age, per week”. By that calculation, I would be handing out almost $20 per week. While that may not seem like much to some, it depends solely on what is right for your family. In our household, we give our 10 year old son $2.50 per week, our 8 year old daughter $2.00 per week. This sounds like a paltry amount and paints me out to be an Ebenezer Scrooge type character, but our goal is not to simply dole out money like an ATM–we want our children to learn how to save. We have offered up an incentive to save–whatever they deposit, we will match 100% but that amount has to remain in savings for 2 months. After those two months, they can withdraw for specific purchases as long as they have a $50 minimum balance. The money is theirs to do as they see fit because nothing is a harsher lesson financial lesson than buyer’s remorse. And to be clear, no double dipping–no matching of withdrawals if they redeposit the money.
My youngest has only just started her bank account; years of allowance, tooth fairy money, and birthday money plus our matching system has her with $263.92 exactly. She has been building her excitement every day for her two month mark so she can make a withdrawal. She doesn’t have any solid plans for purchasing anything, but simply knowing she can is exciting in itself. Our son on the other hand, has had his savings account for about three years now and has saved up for things that are important to him. $300 to go to a comic book convention (of which he spent about $20), $200 for taekwondo padding and gear, and most recently, a used XBOX ONE along with some games and game time which requires a monthly fee.
We do not tie allowance to chores and luckily for us, we have rarely had to use it as a condition on their behavior. As they grow up, there will be more stipulations regarding their allowances, but by that point the allowance amount will have grown as well. Not everyone agrees with our allowance method and it certainly isn’t for every child. It really depends on the individual child and family.
Unconditional allowances — those not tied to chores — may be the worst.
Chores certainly contribute to children’s character development and future career success, according to various studies by Harvard University and the University of Minnesota. Some child behavior experts say chores should be unpaid to teach the importance of contributing to the family.
But financial literacy expert Lewis Mandell has found in his own studies and reviews of others’ research that kids who receive no-strings allowances knew much less than others about saving, spending and credit, and they had a worse work ethic.*
Our allowance method is by no means “no strings attached”, but in our home, we discuss all aspects of money openly. This topic is difficult for many adults because the topic of money has been considered rude and the business of adults, not children. If financial discussion is not for children, then how will they be able to discuss it as adults?
Allowance is just a small part of the financial education we hope to give our children. As they get older their allowance will increase as will their household and school responsibilities. More important than allowance or toys, teach your children value–cheaper is not always better, new isn’t always better than used, and the value of people should not be thought of in financial terms. As much as we focus on money as a tool, and value and appreciate what money can do, we never forget about about the importance of what money cannot replace.