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Most schools don’t teach personal finance, so it’s up to parents. There is no better way to start teaching good personal finance habits than by giving your child an allowance.
It Starts Younger Than You Think
It might not even occur to you to start teaching your child about money when they are just toddlers, but by age seven, kids’ money habits are already in place.
A study found that by seven, children can recognize the value of money, can count it, and understand it can be exchanged for goods and services, and that money is something we earn.
How can children so young already have formed money habits? The same way they develop eating or reading or cleaning habits, by watching their parents. There are other influences certainly, but none are as powerful as observing mom and dad.
Have your kids ever seen you pay for something with cash? Many people use a credit or debit card for everything because it’s easier and a better way to track spending than cash.
If your kids haven’t seen you spend cash, only swipe a card they may think money is something there is an endless supply of. Cash is a much more tangible way of spending money. Even very young kids can see that once the cash is gone, you can’t buy anything else.
Maybe your kids see you fret, worry, and sometimes even fight over money. That can teach children that money is something that causes stress and conflict.
Some parents go too far in the other direction. You never talk to your kids about money either because you think they’re too young to understand, it’s none of their business, or you are stressed over it and don’t want your kids to worry.
We’ve already seen that it’s almost never too early to teach kids about money. It’s the attitude that money is a personal thing not spoken of in “polite company” that makes money a taboo subject and that has all kinds of ramifications.
It keeps people from being paid the same as colleagues of similar standing because employers make veiled threats about what will happen if coworkers discuss salary. (It is illegal to be fired for discussing pay).
Money taboos also prevent people from asking questions and seeking help when they are having difficulty which makes it even harder to fix whatever the problem is.
Children are more observant than we think. If you are worried about financial issues, you may think you’re doing a good job of hiding it from your children, but they can pick up on things like that, so the fact that you’re not discussing it makes it even more frightening to them.
They don’t know what is going on, but they know it’s something bad, and just like many adults, when we don’t know just what is going on, we tend to land on the worst case scenario.
You might be stressed about where you’re going to find enough money to buy Christmas gifts. They might think you have a terrible, incurable illness!
We can see the importance of teaching kids about money, and we need to do it before age seven, so what age should we start?
Starting around age three, children can understand simple concepts like counting, accumulation, and earning. You can teach children to count small amounts of money.
Kids can see that having three of something (most things!) is better than having two. Kids can understand that the reason mom and dad leave the house every morning is that having a job is how you earn the money you need to pay for things.
This is the right age to teach children the difference between wants and needs. They’re hungry and want a cookie but what they need is dinner. They want the sparkly princess dress, but they need a winter coat.
Children can understand that we have to put needs before wants because we can’t have everything.
Have you ever heard of the Stanford Marshmallow experiment? In a nutshell, children had the choice between having one marshmallow immediately or waiting a few minutes and getting a second marshmallow.
The researchers continued to follow up with the children who took part in the experiment for many years.
They found that the children who waited had better life outcomes in areas like GPA, standardized testing, and even body mass index numbers than the children who ate their marshmallows immediately.
The results of the marshmallow experiment show that children who understand delayed gratification do better in life. It’s an important lesson. When we allow ourselves to have everything now, we miss out on having more later.
You can see how this is easily translatable to personal finance. The $100 we would like to spend on a new pair of shoes will be worth much more than $100 if we invest it and allow it to grow.
Play using imagination is also a great way to teach kids this young about money. You can build a store, and the child can sell and buy items using pretend or actual money.
Or you can turn dinner into a restaurant. This can help teach children a lot of important skills like planning meals, setting and clearing the table, meal preparation, and earning money or paying money for the meal.
Toddlers don’t have many expenses they are expected to pay themselves so why should they get an allowance and for doing what? Toddlers should get an allowance because it gives them real-world experience when it comes to money.
Learning any skill in the classroom is great, but it’s not until we practice that skill in a real-world setting that we truly understand it. Even giving small amounts of money helps children understand how money works.
There are some things that should not be monetized no matter what age your child. Everyone is responsible for keeping their own bedroom tidy, for putting their things away when they finish with them and carrying their dishes to the kitchen after meals.
Looking after the family pets should be treated the same.
They are members of the family, and it should not be considered a chore to take care of them. These are all things children should do because they are things you do when you’re part of a family and not because you’re being paid.
Toddlers can earn allowance for things like helping mom and dad in the kitchen, making a grocery list, and chores in the yard.
How much you give for an allowance is individual to each family, and some like to use the formula .50 or $1 for each year of the child’s age.
Because so many of us bank online, a lot of children may have never been inside a bank. While you can open many bank accounts online, it’s a good idea to take kids of this age into an honest to goodness bank branch to open a savings account.
It teaches kids how to deal with a bank teller, how to fill out the necessary forms, and gives them a sense of ownership about their money and makes that money feel more “official” than just sticking it under the mattress.
This is also a good way to introduce the concept of compounding interest. That when we put our money in a savings account, it grows. We make more money without having to do anything.
Now of course, as adults we know that the .001% interest a savings account gives us isn’t going to make us rich and in fact, at that rate, our money loses value due to inflation but those are things we can explain later.
Opening a savings account, with all its flaws, is still a good lesson. It also curbs impulse spending because the money is a little harder to access. Another good lesson in delayed gratification.
Children at this age can understand price differences and unit measures. When you take your kids shopping, have them help you compare prices.
Sometimes two items will have different prices even though they are exactly or largely the same like a brand name roll of paper towels and a generic one.
Sometimes a higher price doesn’t equal a lower price. Furthermore, when we buy more of something, often its cost per ounce or pound is cheaper. The larger jar of tomato sauce costs more than the smaller one but ounce per ounces, the larger jar is cheaper.
Children at this age still love toys but have many they are now too old to play with. Help your child go through their old toys and decide which ones they want to part with. The rest of the family should go through their belongings as well because you’re going to organize a yard sale!
You can help your child price the items they want to sell and at the sale, they can take payment and make change for the customers.
Having a yard sale teaches kids that it’s a good idea from time to time to reduce the number of possessions they have, that doing so can earn them some money, and handling transactions help them to learn simple math.
By this age, kids are old enough to clean rather than just tidy. They can be assigned chores like dusting and vacuuming. It’s also a good age to teach a child to do laundry.
With colorfast fabrics, we don’t need to worry that your kid will throw a red sock in with the whites and stain everything pink but be sure to teach them to separate delicates and what temperature settings to use.
The .50 or $1 per year of age is still appropriate for this age.
While tweens are too young to get a traditional part-time job, there are ways they can earn money. Tweens can do things like mow grass, rake leaves, and shovel snow. Help your kids print up flyers offering their services and distribute them to neighbors.
Having this sort of “in-between” job can help kids learn some of the skills they will need to get a more traditional part-time job in a few years, being on time, keeping track of payments and outstanding payments, and dealing with customers.
Opportunity cost sounds like a super complicated personal finance term, but it’s just a fancy way of saying, if you buy or do X, you can no longer buy or do Y. If your tween has a neighborhood job, they might be bringing in a nice little bit of money and want to spend it as soon as it hits their pocket.
This age is a good time to explain opportunity cost. You want that video game right now, but you also said you wanted to buy a new pair of sneakers.
Up to now, mom and dad might have bought the sneakers anyway, but now that the child is earning additional money, he or she needs to start funding some of their own wants. This helps teach kids to prioritize their spending.
If your tween has a job, it’s still important that they have some chores at home. It can help teach them to balance work and home duties which is something all of us have to do eventually.
Hopefully, your kids have been in the kitchen with you for a few years now and know some basics. It’s time to get them more involved in the meal planning and preparing process.
Let them know what you’re planning for the main dish and let them come up with and prepare the sides.
Tweens are old enough to take on some of the more onerous household chores like cleaning a bathroom and mopping hard floors. The .50 per year of age is too low for tweens, and $1 might still be a bit low. Maybe round it to $15 a week.
The teen years are the ideal time for a first “real” job, one with hours and coworkers and bosses. This teaches kids how to schedule their time so they can fit in school work, a job, a social life and perhaps after school activities.
It may mean that some activities must be given up. That’s a choice adults often have to make as well.
A job teaches kids how to deal with a boss and coworkers, something most of us will be doing for the next several decades so the sooner we start, the better we get at doing it.
A part-time job can also teach a teen what they don’t want to do. Maybe they hate dealing with the general public or the stress of working in a restaurant.
Knowing what kind of career you don’t want is just as important as knowing what kind you do want, especially because your teen may be choosing a college major very soon.
This is also a good age to teach children about quality. A higher price doesn’t always mean a better product, but sometimes the cheaper option can cost us more in the end. Shoes are a good example.
A cheap pair of shoes often wears out very quickly, even before a kid in the midst of a growth spurt can wear them out. So we have to replace those cheap shoes more often than if we had bought better quality ones and doing so costs us more in the end.
At the same time, you don’t want to teach children that the more expensive item is always the best one. There are plenty of stops between Pay Less, and Bally custom made that give good value for money.
If a child wants to make a big purchase, show them how to research it to make sure they are getting good quality at a good price. There are tons of review sites; we like Buy it For Life on Reddit.
This is another good opportunity to show how important delayed gratification is. If your child waits a little longer and saves a little more, they can buy a better quality item that they’ll have for many years.
Let teens take over one night of cooking per week. This means they plan the meal, shop for, prepare and clean it up. They will be leaving home soon and doing this seven days a week.
You might want to lighten up a little on other chores if your teen has a part-time job. As they near senior year, they will have a lot of additional studying to do preparing for SAT or ACT testing and choosing a college.
If your teen has a job, you don’t have to make a big jump in the amount of their allowance.
You might also consider continuing to pay an allowance but holding it in your bank account or 529 College Savings Plan account and letting them have the money when they leave for college to help pay expenses or just as pocket money.
Okay, we covered how much allowance to give and for what but what do kids do with it? Can they spend it however they like or do they have to save every penny until they leave home? We like the GISS method. GISS stands for give, invest, save, and spend.
The allowance is split between those four things. How it’s split is up to you and your child, some decide just to split it evenly. Giving teaches children that it’s important to use some of what they have to help others.
It can be interesting for a parent to see what kind of charity their child chooses. Maybe they want to help animals or other children or veterans.
When your child has saved up enough money to donate, mom and dad can write a check to the charity. If it’s a local one, take the check in person. It’s a wonderful thing to be charitable, and you want to make an event of it for your child.
If you have to mail the check, have your child write a letter to the charity expressing why they chose it.
Investing money means just that, putting money into something like WealthSimple. WealthSimple doesn’t allow custodial accounts but you can add your child’s money to your account, and they can open an account when they turn 18. A 529 College Savings Plan is another way to invest that money.
The best part about WealthSimple? You get a $50 bonus when you deposit your first $500.
The saved allowance is for things the child would like to buy but need to save up for, more expensive items like a bike or a gaming system. This helps kids learn delayed gratification and makes finally buying the item an achievement and not merely something handed to them by someone else.
The spend allowance is for the child to buy whatever they want. And it really should mean that. Even if it seems silly to you and you know they will lose interest in it within a week, that’s okay.
That can be a good lesson too. All of us work hard for our money, your child included, and we’re all allowed to have a little fun money so long as the rest of our money is spent wisely.
Into Every Pocket, Some Money Must Fall
Having some money of your own is important, even for a very young child. It teaches responsible financial behaviors that hopefully your child will carry with them for the rest of their lives.
Having money also gives us a sense of freedom and of choice, two powerful things that even very small kids can understand and respond to.
All good parents want to make sure their children don’t repeat the mistakes they made. When you look back, a lot of your mistakes are probably financial ones. But you have a wonderful opportunity to teach your kids to do better, make sure you take advantage of it.