HOW TO HANDLE KIDS’ ALLOWANCE?
Offering children an allowance provides the opportunity to have ongoing conversations about important financial literacy skills. And that's critical. According to researchers, three out of four young people cannot answer basic financial questions. In addition, dealing with small amounts of money when they're young allows children to make mistakes and learn from them, before poor financial decisions have serious consequences
–Jenny Friedman, Executive Director
ALLOWANCE IN THE 21st CENTURY
Make a Difference...
There are benefits and drawbacks to the various approaches to allowance. But no matter what you decide about method and amounts, what's most essential is having real-world conversations with your child about expectations, thoughtful spending, strategies for saving, and the importance of charitable giving. Here is some guidance.
When to start. Most experts suggest starting allowance around kindergarten, when children begin to understand that money has value. But use your own child's interests and development to judge the best time to begin.
Chores or no chores. Many advise against tying allowance to chores. After all, chores are what we do as family members, not something to be compensated. (No one pays you to do the laundry.) Also, problems can arise if your children eventually decide they have enough money (or begin earning money outside the home). Then they no longer have an incentive to take on their share of household tasks. There is an alternative view, however. Some argue that paying for chores helps children learn about the value of work: work more, earn more.
How much to give. Don't worry too much about the amount. What's key is that you use the allowance to spark conversations about money management. Some suggest $1 per week for every year of your child's age (e.g., an 8-year-old would get $8 a week). However, whether this makes sense depends on your family income and values and what the child is expected to purchase with that money (for example, school clothes and supplies, or simply outings with friends and special treats).
Online or "real" money. Cash certainly is more tangible for younger children, but the reality is that most money transactions are done online. That's the world our kids live in. There are many finance apps for families that make the process of giving allowance easier. These also help kids set goals, learn about interest, and more. You can compare some of the options here and here. It might take you a bit more time to get started, but these online allowance programs could save you the hassle of scrambling for dollars every week.
The Share, Save, Spend Idea. When you split your child's allowance into three (not necessarily equal) portions, you get to have ongoing conversations about the value of sharing, saving, and spending -- the three essentials of money management. This idea also makes it clear to children that charitable giving should be a part of any financial plan. To encourage sharing and saving, you might consider matching those portions of their allowance.
MONEY TALK
Talk About It...
The ongoing conversations you have with your children about money are far more important than any decisions you make about the age to begin an allowance, the amount you give, or which (if any) online tools you use. A June 2010 study by Capital One Financial Corporation (which is no longer available online) reported that nearly half of graduating high school seniors didn't feel competent to handle their own finances. But the researchers also noted that the more families talked together about money, the more financially capable the young people felt. Use these tips to get the conversation started.
While you're out shopping:
Describe what happens when you swipe your credit card.
Have your children help you compare the price and value of similar items to determine which one to purchase.
Explain why some items you'd love to own are not within your budget.
When you do make a large purchase, talk about how you plan to pay for it.
Talk about charitable giving, about which organizations you donate to and why. Present young children with two or three "causes" they might consider donating to and let them choose. As kids get older, talk about how they can research nonprofits to find ones they'd like to support. Consider visiting local organizations -- and even volunteer -- to learn more about their work.
Talk about it if you are saving for a vacation, for your children's college fund, or for a house or car.
Talk about "wants" and "needs," and how to distinguish between the two. Consider which foods are wants and which are needs. What about a house? car? school? medicine?
Ask fun questions (with no right answers) to get the family talking about money values:
Would you rather have lots of money and no friends or lots of friends and very little money?
What's one thing you wish you hadn't bought and would like to have your money back?
If someone gave you $20, would it make you happier to spend it or give it away?
Learn About It...
The Money Tree by Sarah Stewart. This charming story about a literal money tree growing in Miss McGillicuddy's yard prompts conversations about values, gratitude, and balance. DGT's Big Hearted Family Members can get cut-and-keep conversation cards for this title.
A Chair for My Mother by Vera Williams. A hopeful, heartwarming, and inspiring story about hard work, saving -- and what neighbors helping neighbors can mean when families are faced with hard times.
INSPIRATION
"The number one problem in today's generation and economy is the lack of financial literacy."
– -Alan Greenspan, American economist and former Chair of the Federal Reserve