In a previous post, I discussed the importance of teaching your child at an early age about finances. One question that comes up frequently:
When should you start giving your child an allowance, how much and under what circumstances? An allowance is much more than pocket money for a treat or a toy. It is a teaching device.
Personal finance is one of the most important life lessons that is rarely taught at school. It is every parent’s responsibility to teach basic financial skills like differentiating between needs and wants, prioritizing and making good choices and saving. The way that you give your kids allowance is one way that you can help them learn these lessons.
The purpose of giving an allowance is to help children learn how to manage money effectively. It helps them save for things they value while they are younger. It teaches children about making smart choices, personal responsibility, the benefits of hard work and its rewards.
Should you give an allowance based on chores, or give a specific amount each week? There are many experts who disagree on this point. One effective approach is the method John. D. Rockefeller used with his children. The tycoon gave a small amount to each of his children every week.
This helps them learn to manage it on their own. If the child wants to reach a goal, such as buying a new toy, she needs to work and save up to come up with the extra money. This method encourages hard work and goal-setting, while ensuring that the child gets consistent practice managing money each week.
When should you start giving your kids allowance? The most common age to begin an allowance is around five or six. For young children, be sure to pay the allowance the same day each week and to use small bills and coins. The child can practice math skills and help count the money.
Make sure that you are consistent and explain that the allowance can be spent on personal items such as toys, books or something larger. This teaches the value of saving for bigger goals. Some studies that building the willpower to delay gratification is a trait that leads to financial success later in life.
Many parents increase the allowance yearly, or based on the chores that the child does. With more responsibility, the child learns that hard work is rewarded.
It is important to give the child cash in small denominations rather than keeping custody of the money with a ledger. Children need tangible visual experiences with money to truly understand the exchange of money for goods. Even adults tend to spend more freely when they use credit cards.
Giving the child cash lets her see her savings build up over time, gives her the opportunity to count the money. Giving the child responsibility over the money can teach the importance of being careful not to lose or overspend money.
What age and method do believe is best? Let me know.