The importance of teaching financial literacy to children cannot be overstated. Over at Good Men Project, Zechariah Newman wrote a revealing, useful post about kids and money. I agree with each of the seven money topics he thinks parents should discuss with their children: abundance, give, invest, debt, save, spend, perseverance.
I believe that the best way to teach financial literacy is through experience. That means giving kids an allowance. Vicki Hoefle of Duct Tape Parenting has been my guide on this topic.
Vicki believes that there’s one goal behind an allowance: teaching children about money management. That includes saving, spending, and donating.
She doesn’t recommend using allowance as a reward, or to pay for chores. Giving money out for those reasons won’t necessarily teach kids how to manage it. And kids should be contributing around the house anyway.
Letting your kids choose how they spend or save their money is a key part of this approach. If they want to spend all their allowance on junk food and crummy toys, week after week, fine. It’s their money, their choice and eventually their lesson.
Over on PBS Newshour, Vicki writes:
“It’s also important to remember that you become a smart consumer by actually being a consumer. Initially, five-year-olds are not what anyone would call savvy. They get $5, they spend $5 — almost immediately. But by the time they are 10 and have practiced basic money management, they are much more thoughtful and educated consumers.”
A genius element of this approach comes into play when your kids nag you to buy stuff for them when you’re out shopping. All you do is repeat variations of “Did you bring your allowance?” If they brought it and have enough money, then they can buy whatever they’re begging for. If not, sorry kid. I feel your pain, but already gave you the allowance.
In my house, we started following this practice two years ago. At first our four-year-old spent her allowance on small items like Pokemon cards and Legos. Now, two years later, our six-year old has learned to mostly save. (She currently has over $100.)
Even better, she almost never pleads for us to buy stuff when we’re grocery shopping or at a store. It took some time, but this approach is now a family habit.
I will admit that this approach has backfired on me. Now that she has her own money, bribing her has become a lot harder. Can't bribe her with Pokemon cards, for example, because she can buy her own.
A couple other tips from Vicki Hoefle:
The child should have a wallet for their allowance.
When they’re old enough, help them open a bank account.
Never, ever front them money if they forget their allowance when you’re out at a store.