According to a research by T. Rowe Price, 70 percent of kids get some kind of allowance nowadays. It’s essential that parents empower them with financial knowledge and freedom.
While there are arguments against giving allowance to kids, two studies from the “Journal of Economic Psychology” and T. Rowe Price indicate that kids who receive allowances tend to be more knowledgeable than kids who don’t.
Studies have shown that a good number of parents are poor financial role models for their kids. If you’re considering giving an allowance to your kids, here are some basic things to consider:
1 | Have a plan
Before you place your kids on an allowance, consider your motivation for doing so. Why do you want to place them on an allowance? How much? How often? And most importantly, what do you hope to achieve by placing them on allowance?
Make a decision about whether you’d like to give your kids a weekly or a monthly allowance. A weekly allowance may be more appropriate for younger children, as monthly may seem like too long a time span.
No matter how small a child’s allowance, you should encourage them to save a little from each, then talk about the benefits of saving money for the future.
It’s vital to keep a future goal in mind when considering an allowance plan for your child. Helping them set goals (and sometimes limitations) and sticking to a plan plays a significant role in guiding them.
2 | Brighten their financial future
Giving your kids an allowance can make their financial future brighter. Kids who receive an allowance prove to be better with money than kids who don’t.
Allowances give kids practice handling money. They learn some basic money management skills that will guide them toward eventual financial independence.
3 | Talk to your kids about money
Yes, giving your kids an allowance is important, but, that alone will not teach them everything they need to know about money. You need to talk to your kids about money, too.
Kids whose parents often talk to them about money have more confidence handling money than kids whose parents do not. Even talking about money in the presence of kids is good for them.
A study by the American Institute of CPAs (AICPA) indicates that kids commonly use their allowance money to purchase toys and to hang out with friends. This is mostly because parents are more comfortable and accustomed to talking about drugs and bullying than spending and saving.
Encourage your kids to set up a spending plan for their allowance. Show them an example of your own spending plan for the month, which may include gas expenses, groceries, electricity bills, and repayment of debt or a mortgage.
The more kids engage in financial discussions, the more likely they will learn valuable financial lessons and develop good money management skills as they grow older.
4 | Never base allowance on chores
One mistake some parents make is to base their allowance on certain conditions, such as chores to be carried out by their kids. Giving kids allowance based on chores is akin to giving them bribes.
This is not to say it’s not good to reward kids for good behavior or for performing chores at home. It just shouldn’t be tied to their allowance.
Research by UCLA researchers, Eva H. Telzer and Andrew J. Fuligni indicates that kids who don’t get paid for chores feel a greater sense of self-worth and contentment than kids who do.
When you pay kids for chores, you send a message that chores are optional, or worse, that they are not equal participants in the family. When they grow older, they may decide that the money isn’t worth the chores and stop participating altogether.
Also, never hold back a child allowance as a punishment for something they did wrong. A well-formulated allowance plan shouldn’t aim to control the child. The allowance should give the child the freedom to apply some independence and make some of their own choices. Keep in mind that we’re training our kids to be responsible adults, not imposing our will upon them.
5 | Let them make mistakes
People make lots of financial mistakes, and kids are no exception. Giving your kids allowance will enable them to make some mistakes, and that’s okay. These mistakes will give you the benefit and opportunity to educate them better on the importance of financial literacy.
Making mistakes now will help kids better manage their money in the future. For instance, a child is saving to buy a video game, but falls short of the complete payment because of an uncontrollable urge to buy an ice cream. Resist the impulse to make up the balance money for him and encourage him to save more to achieve his end goal.
Let kids learn as much from their mistakes as they will from making good financial choices. Help them celebrate the wins and talk over the unwise choices. Teaching your kids the consequences of poor financial decisions will help them in the long run.
This singular lesson can go a long way in setting them up to become sound financial managers in the future.