The only way kids learn to manage their money is through trial and error. What better way than to start them off on something small and manageable. Today, kids have more money to spend (compared to us when we were their age, that’s for sure) and as such, they are developing their own financial styles or habits knowing or unknowingly. Kids who develop good or bad financial habits will foreseeably take those skills into adulthood. If the latter is their money blueprint, then there could potentially be painful and expensive money lessons on his/her horizon. The education system is definitely not helping raise awareness and/or instill structured money management skills for our next generation. Heck, we ourselves were never taught the same during our time. And for those of your luckier ones, your parents were a great role model for you financially. If you were one of them, be thankful. It’s time to pay it forward and teach your kids the same or better.
To be fair, you should only start imparting the basics of money management when your child is able to understand the basic concept of money. Interest is key here as would be case for all other things in their life – music, swimming, ballet etc. For me, the two compelling reasons why an allowance is a must for my kids is to force them to think of how much something costs and to weigh their spending choices as they only have a fixed amount of money. Let them make mistakes with their spending choices – no one gets it right the first time especially when you are only 4 or 5 (maybe even younger). It’s better to learn from those mistakes when the ‘tuition fee’ is only $5 or $10.
As a parent, you must sit them down and tell them exactly (clarity, clarity, clarity) what the allowance is for. Not the specific things that they can or cannot buy, but the 3 main areas the allowance is meant to provide for; namely saving, spending & sharing. Make a list of things the allowance covers so that he/she knows that they cannot come back to you whining and begging for more money as they NEED to spend on something they forgot to allocate for that week.
When I was about 8 or 9 years old, my father insisted each of his children keep a log book to pen down all the details of our spending. He would then go through it on a weekly basis, asking us questions and imparting some advise before he gave us the next allowance. If we wanted a raise in our allowance, we would have to tell him / write in our log book the items in which we wanted to purchase/spend on but could not due to the limitation in the dollar amount we received. In retrospect, I realise that this interaction created an opportunity to discuss and realign my money management education as a child.
The savings from each weekly allowance payout will then be banked into a kids saving account monthly. He would take us all to the bank and we made the deposit jointly. Afterwhich, he would explain to us the details in our passbook – how much we had accumulated and the interest given by the bank. Experts today recommend that 10% of your kid’s allowance should be allocated towards savings to build this good habit. Make sure that the allowance is given on a fixed interval, ideally weekly, as you are leading by example. Also, stick to your word as kids wise up pretty quickly when they spot that you do not act according to the financial discipline you preach.
One final question to answer – can I tie in the allowance amount to household chores completed? I will recommend no as it is the responsibility of each family member to contribute towards the household chores. These responsibilities should be separate and apart from the allowance given as the latter is aimed at teaching them the value of money. Be focused and remember that the allowance money lesson is aimed at building a longer term foundation to carry them in the right directions as an adult.
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