Allowances: A Great Way to Teach Financial Literacy
Children begin developing personal finance skills if presented with the right opportunities early in life. It’s important to allow them to make financial decisions while under parental supervision.
One key to understanding how to manage money is to first earn it. Fortunately, there are many ways kids can earn money, and one of those ways is from an allowance. Allowances are money paid for a certain set of activities, such as cleaning the bathroom, taking out trash, or whatever a parent deems appropriate and can be used as a tool when teaching financial literacy concepts. Receiving an allowance empowers kids to take some financial responsibility, to make decisions about how to save and spend, and to understand the importance of balancing priorities when making financial decisions.
Here are a few considerations when setting up an allowance system:
- Pay for tasks beyond basic chores: Many families provide an allowance for chores or activities completed over and above the basic duties required from being part of a family unit.
- Set clear expectations: Kids should understand their list of responsibilities, the related timeline for completion, and the amount and frequency of allowance payments.
- Determine a payment system: There are many different approaches to giving allowances. Many parents use an age-based system—a seven-year-old receives $7 a week and a ten-year-old receives $10 a week—for a defined set of tasks. Determine when you will pay: weekly, bi-weekly, monthly? Will you pay in cash, electronic transfer, or in the form of a check?
- Be consistent: Try to avoid giving advances; it sends the wrong message as most workers can’t get advances on their paychecks. Consider setting expectations that allowances be used for immediate spending needs or that a portion of the money needs to be deposited into a savings account.
- Set savings goals: Fostering the concept of saving early and providing the tools to do so will empower children. When creating a savings plan, children can set goals. Do they want to save for a new bike, a new gadget, or concert or sporting event tickets? Once goals are in place, determine the weekly or monthly dollar amount to be earmarked for savings. Although this is a fluid process, and making adjustments is common, setting up an initial plan will help children get used to the routine practice of saving.
- Determine where to save: Once goals have been determined, discuss where to save. Where will the money be deposited (a piggy bank, a real bank, on a cash card?). If opening an account for the child, consider taking them to the bank to make deposits and review deposit slips. For older children who have an ATM card attached to their bank account, review online statements often to see the progress of saving. It is exciting for kids to track their progress!
- Seek teachable moments: Once children begin earning money, they will learn that it can be difficult to manage competing desires and financial priorities. Having conversations surrounding money management will set the stage for children to make important decisions about how to allocate the money they have. Learning these skills will serve them well in the future.
