When it comes to children and money, there are few topics that cause more confusion among parents than allowances. How much should you give? Should you require chores in return for allowances? Do you make your child save a portion of allowances? How do you know if it’s “working?”
While having a set of “rules” for allowances would be nice, the truth of the matter is that there is no “right” or “wrong” way to do allowances. That’s because the value of allowances comes from the interaction between you and your child about financial matters. In other words, it’s how you talk about money – along with your own financial habits – that help children learn about making choices, delaying gratification and saving for stuff they want.
With that in mind, allowances are a great tool for giving your children a solid financial footing because they provide you with a reason to talk to them about money. It provides a regular opportunity to have those important conversations. You’re able to ask them about what they’re going to do with their money, the value of saving it for a bigger purchase or the concept of “when it’s gone, it’s gone.”
Here are a few things to keep in mind as you figure out allowances for your family:
How early? Once your child starts asking about money, has a basic understanding of math or is asking to buy things he or she doesn’t need, it’s time to start a small allowance. How much is up to you. Some people recommend giving half the dollar amount equal to your child’s full age. So, a 10-year-old might get $5 per week. It really depends on your family budget and what you’re comfortable with.
Help them watch their money grow
Saving is an important lesson for children and helps them learn delayed gratification. One way to do this is to ask your kids to set aside money for a coveted toy and make a plan to work towards it. Some parents might offer a match for savings, just as an employer would for 401(k) contributions. As your child accumulates more money by saving, take him or her to a bank to open a savings account.
Tie allowances to chores? Hold on…
Some financial experts say an allowance is a learning tool and should not be tied to chores. Your child should be in charge a few chores, like cleaning his room or clearing off the table, without receiving any compensation for it. However, you might agree to pay your child additional cash if he or she takes on more work around the house.
Determine if anything is off limits
Just because children have their own money doesn’t mean you – as a parent – don’t get a say in how they spend it. It makes sense for parents to come up with a list of items that are strictly off-limits, based on rules you may already have in place around what your children are permitted to do or play with.
Talk about it!
Most importantly, talk to your kids about their allowance and how they can manage their money. In addition, talk about money with your partner in front of your kids. According to a recent T. Rowe Price study, kids whose parents talk about finances in front of them were more likely to report the following (compared to kids whose parents didn’t discuss financial topics in front of them):
- Say they are knowledgeable about managing personal finances (39 percent vs. 16 percent).
- Think their parents are doing a good job teaching them about finances (58 percent vs. 32 percent).
- Think they will go to college (86 percent vs. 72 percent).
- Feel they are smart about money (45 percent vs. 24 percent).
Make it a learning experience
Part of learning how to manage your money is making mistakes along the way. If your child is saving for a special toy but makes an impulse buy along the way, resist the urge to make up the difference. It’s important kids understand that their financial decisions come with repercussions.
If you’ve got questions about kids and money, please don’t hesitate to reach out to your local MidWestOne banker.