One of the best gifts you can give your child is the gift of financial literacy. As soon as your children reach the stage of comprehension, usually by age 5 or 6, you can begin to teach some elementary money concepts. And of course, the best way to teach is by example. What they see you doing will leave the deepest impression. Allowances are a great way for children to learn about earning power, saving, budgeting, and consumer consciousness.
Before getting into allowance tips, you need to think about how it will be paid. Financial experts suggest three ways to set up an allowance. Each one comes with its benefits and pitfalls. You’ll need to decide what is best for your children based on their age and personality.
- No work required They receive the same amount every week, bi-weekly or monthly.
- Attached to specific chores Be clear about what tasks must be done, and if they’re not completed, there’s no allowance.
- Commission. Price out each chore and let your children choose where they want to put their effort. Tasks that take more time would be priced higher.
1. Match the allowance to the age of your children
There may be a going rate in the neighborhood, but it’s better to match the allowance to your child’s age. They learn that as they get older and take on more responsibilities, they earn can more money.
2. Open a savings and checking account
Take your children to the bank and help them open a savings account. For older children, they should open a checking account too. Since everything is digital today, it’ll be easy to monitor their bank accounts from home. Teach them the concepts of deposits, interest rates and debits.
3. Encourage your children to save money
With money in the hand, saving is going to be the challenge, especially for your little ones. You can use a matching program as an incentive. If they save $5, you promise to match it. Now they’ll have $10 to buy that toy they’ve been wanting. You can use this concept to help them save for expensive purchases too. For instance, when they’re older and want to buy a car, you can offer to match what they’re able to save toward the price. The same incentive program can work to help them build up their savings accounts.
4. Let them have a say in how they spend their allowance
This is important when using an allowance to teach good money management. By having control over how the allowance is used, your children learn to set goals, plan purchases, separate needs from wants, and delay gratification. You can teach them how to make their money last longer by comparing prices and taking advantage of savings opportunities such as coupons. Ultimately, the spending decision is theirs. But, if they deplete their allowance, don’t cave in and give more.
5. Set expectations
Will your children be expected to pay for certain things with their allowance? When older, you might suggest using their allowance to pay for extras, such as subscription services, going out with friends and other non-essential costs. You might continue to pay for clothing, but if they want something more upscale or beyond the usual, tell them this must come from their allowance. You’ll avoid conflict and disappointment if everyone has the same expectations.
The most important thing is that you be consistent. Whatever agreements you make with your child, stick to them. You can let them bargain with you for an advance or increase. This teaches them how to deal with creditors later. But also impose financial penalties, for instance, if you agree to a loan and they don’t pay it back.
Communicate, keep it fun, and be patient. An allowance can be an impactful way to set your children on the road to financial freedom.