Teaching Finances

Piggy bank
Photo of piggy bank.

It all started with a simple request from my oldest child: an allowance.

I had wondered a few times over the past year whether it was time for an allowance for one or both of my children, but it kept getting put to the back burner as we dealt with more impending issues, like homework or dinner. With the school year winding down, it was a good time to look into the research on teaching financial literacy and enact a plan. After a few weeks of reading developmental and economic studies, there is a pretty clear path forward for science-minded parents who want to teach their kids good financial skills.

It basically comes down to this – just like practice is required to learn to ride a bike, practice is required to teach kids to be financially responsible. The way that we can do this is by giving them an allowance. An allowance is an opportunity, each week, to talk about finances with your kids. It is how you will teach them to save, spend, and give away their money.

There are 4 things to know about implementing an allowance for your child or children.

  1. Allowance should be unconditional.
  2. Allowance should be small, but not too small.
  3. Allowance should start early, by 6-8 years old.
  4. Allowance needs to be accompanied by a conversation about finances.

Let’s talk through each in turn.

Allowance should be unconditional

An allowance should be a weekly financial gift to your child. You should not tie to it chores. I recognize this is a controversial position, but let me explain to you why you should not make your child work for their allowance.

You want your child to develop an intrinsic reward for completing their family chores – basically, you want them to feel good for completing the task and helping out the family. You do this by thanking them, encouraging them, and working side-by-side with them to accomplish chores. This teaches your child that there are things that you do, without pay, because it is the right thing to do. This means that your child will eventually just do their chores without being asked, because it makes them feel good to be a part of the family unit. Chores are something we socialize our children to do.

You do not want to reward your child with an extrinsic reward ($cash$) for completing their chores and family obligations. This is teaching your child to only do chores if somebody gives them something for it – in this case, $$.

In the long term, if you pay your child for completing their chores, you are setting yourself up for World War III. Some random weekend day, when your kid doesn’t want money (maybe because they have enough or are just trying to piss you off), they won’t do their chores.

And the standoff could last for weeks. Where are you going to go from there? You have taught your child that they should only do helpful things like chores if they get paid and now you are backed into a corner. Are you going to offer them more money? No, that’s ridiculous. Are you going to scream and yell? Probably. Screaming and yelling and anger over money – or chores – are not what you want to bring into your family dynamic.

Providing your child an allowance for chores is trying to build an association between work and money. That’s not your goal here.

The point of an allowance is to teach your child about making smart money decisions.

A common response I get on this perspective is that in the real world, you have to earn your money. Why should kids just get money? This is using a business-lens to think about money, where labor means money. You need to put on a parent-lens, where money means a chance to teach your child.

There is nothing wrong with your child doing extra chores to earn additional money – perhaps they go above and beyond on some chores one week to earn a few extra dollars. That is totally fine. But let them drive that choice and idea.

My point is simply that your goal should be to teach your kid about healthy finances. In order to do so, they need to have some money to do it with. A baseline weekly amount should be independent of chores. Remember, allowance is an opportunity to teach about money. Not a moment of teaching about chores.

Allowance should be small, but not too small

There is no real best-practice on how much allowance is appropriate. But, from a developmental psychology standpoint, we want it to be enough money that kids have to wait a little bit to achieve their goals, but also achieve success in a reasonable time frame. Call it a Goldilocks allowance. A quarter a week is obviously too low, because a child won’t have enough opportunity to spend their money. Conversely, $100 a week means that your child can instantly get whatever they want, with no delay of gratification or planning.

Remember the whole point of this is to help your child build up the skills to wait to buy something they want by saving their money. We need the number to be juuuuuuuust right.

The two most common metrics of an allowance are $.50 or $1 x the age of the child. For example, a 10 year-old would get either $5 or $10 a week, depending on which plan you choose. Say your child is saving for a $20 toy, that means it will take your child either a month or 2 weeks to reach their goal. That’s a pretty reasonable time frame to wait for something you really want.

Personally, I favor the smaller amount of money, because for the most part, the point of the allowance is to buy things you aren’t already buying your children. They are not likely to busy basic needs with an allowance. It’s no surprise, that my kids use their allowance for dessert that I won’t buy them. Or bizarre toys. And that’s fine, it’s their money to spend. It doesn’t hurt them to have a wait a bit longer to get what they want. Often times, that waiting period allows them to cool off on a big desire and make a better choice.

Allowance should start early, by 6-8 years old.

Once kids have a basic understanding of money, sometime around 5 years of age, it’s time to start an allowance. By 6 years of age, children have a sense that saving money is a good thing and children who receive an allowance at a younger age report greater saving habits later in life. Combined, this suggests that early elementary school is the time to start an allowance.

Remember, the allowance is about giving the kids an opportunity to practice good financial skills. Kids with an allowance have a better understanding of cash, credit, and pricing compared to kids who don’t have an allowance. The more practice, the better off your child will be. It’s probably better to be too early than too late with starting an allowance.

Allowance needs to be accompanied by a conversation about finances.

The positive effects of receiving an allowance on a person’s financial capability are amplified if that allowance is paired with parental instruction about finances. The most financially competent college students report that parents explicitly talked with them about finances from a young age. Talking directly about credit cards, budgeting, debts, loans, and savings are what helps children develop values – and paired with opportunity to practice these skills through an allowance, kids can develop good financial capabilities. Interestingly, learning through example by watching parents, without having a direct conversation, doesn’t seem to impact how a child understands finances. Explicit teaching about money leads to children being more knowledgeable about the impact of their financial choices, and children internalize those behaviors to use them later in life, when parents aren’t around.

Teachable moments about finances should be quiet, warm, rewarding conversations. It may only last a few minutes, or moments with a young child, but a moment of calm conversation helping your child plan to save, spend, and give their money away. Ultimately, we want to impart our knowledge about good financial habits, but also, make sure our kids can come to us and ask about money and money issues. Taking a time each week when you give the allowance to check in on their goals and plans is scaffolding your child to be able to set financial goals on their own.

Parents seem to be an important socialization force here. Educational programs on financing for kids explain about 1% of individual differences in who is more financially capable. Practically speaking, this means they aren’t doing much good. Which means that the burden falls to parents to be the financial teachers.

Taken together, financial competence and capability is one more gift we can give our children. Through opportunity to interact with money, set their own goals, and talk to our kids about money, we can have positive effects on their financial health long after they have left our financial care.

A few dollars a week is a pretty small price for knowing we are teaching lifelong financial literacy.

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