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How to Teach Your Child Good Money Habits with Allowance
Should Children Get an Allowance?
Some important tasks of parenting include teaching your children delayed gratification, responsibility, and kindness to others. Believe it or not, all three of these lessons can be learned through giving your child a weekly allowance. And, of course, it is never too early to begin teaching money management. The earlier the child learns good habits in this regard, the more likely he will be successful throughout his life.
Since these are all important lessons for any child to learn, allowances should be something the child gets because it is something that you, as a parent, want her to learn from. Allowance should not be tied to doing chores! Chores should be done by a child because they are expected to contribute to the family effort of maintaining a household, not because they expect to get paid for them. If you pay them allowance to do chores, you are teaching them that anything they do they should get paid for, and we know that is not the reality of it.
However, there is nothing wrong with offering a child money for doing an extra job, above and beyond what is normally expected of him. Let's say your child has cleaned his room and finished his usual Saturday chores. You have noticed that the silver tea service you keep in the glass cabinet in the dining room is tarnished and needs a good cleaning. It is fine to offer your child some money to do this extra job for you. In fact, it teaches him the joy of earning money through his own efforts, which is something you want him to learn!
Allowance as a Parenting Tool
But we're getting ahead of ourselves. A weekly allowance is an important parenting tool, and should start as soon as your child is able to identify all the coins and bills and tell you how much they are worth. For most children, this will be about age 5 to 7. Your child should know that getting an allowance is a way for them to learn about saving and spending money, so they will need to follow your guidance as to what is done with their allowance, especially when they are very young.
Open a joint savings account with your child's name on it, and another that will be used for long-term savings. Many banks offere higher interest rates on 90-day savings accounts (90 days notice is required to take money from the account) or other longer term type accounts. Ask your bank what is available in an account that you do not expect to withdraw from for some time. Then call around to other banks and compare to get your child the best possible rate.
Once you have opened these two accounts, purchase two piggy banks for your child. For about $10 you can get one that has a digital counter in it, so that when you put coins into the slot, it keeps count of your total. Or you can get a cute animal bank for a smaller child, but make sure it is one that can be easily opened to get at the money. Using a decorated box or a just a jar is fine too. These should be kept in the child's room, preferably in a prominent place where the child can see them, such as on a shelf or dresser.
How much allowance should my child get?
This is dependent on your means and the child's age. The very young child can get as little as $4 a week. Whatever the amount that you decide on, let the child know that on her birthday every year, her allowance will go up. When you first start off, make the amount divisible by four, so that it's easy for the child to understand. Say you are giving your 6 year old $4 a week. This sum will be divided into four $1 amounts to be allocated to the four different "accounts" that the child now has.
Teaching Your Child to Budget
Teach your child the meaning of the word "budget". Explain that a budget is a plan for how to take care of your money. A budget is something that you make a promise to yourself that you will stick to. Tell him this is what he will be doing with his money.
One dollar will go to the regular savings account. Explain to the child that this account is for things the child might want in the future, such as a bicycle or maybe spending money for an upcoming family vacation. In this account, you make your weekly deposit and let the money build up, so that you'll have it there when something comes up that the child would like to spend some of it on. You should teach the child to hold back on using this account until her balance is substantially more than the amount she is likely to withdraw, and never to let the balance go below a certain amount, say $5 for your six year old, for example.
One dollar will go into the long-term account. Let the child know that this is money for his future, such as college, a car, or starting a business. This money is not to be touched!! With an older child, you can teach them about other options for saving this money, such as purchasing bonds with some of this money, or putting into a Certificate of Deposit. But for the younger child, you want him to be able to see the balance growing in his pass book.
A budget is telling your money where to go, instead of wondering where it went.— John C. Maxwell
Modeling Good Money Habits
Make sure that you take the child to the bank each week, don't make the deposits yourself, or just let it build up for months and then make the deposit. You want to teach your child a habit of going to the bank and putting money in. It might seem silly to put $1 into a bank account, but the tellers will realize you are using this as a teaching tool, if you arrive with your child every week to make the deposits. Let the child see the pass book each time, and show him how the numbers are getting bigger, week by week. You can look at the balances online too, but a young child can relate more easily to the pass book held in his hand. (Whatever you do, make a vow that you will never rob your child's accounts when you need money! This will defeat the whole purpose of doing it, not to mention modeling bad choices to your child!)
The "Fun Part" of Your Child's Budgeet
The other $2 gets divided up into the two piggy banks. One piggy bank is for spending at any time. Teach the young child that it's more fun and profitable to let this money build up a bit before using it too, since you can get more with more money. But don't make her save this if she doesn't want to. The point here is to let her go through the money right away if she wants to, and then she learns that spending all your money as soon as you get it means you never have any money! Soon the child will learn that it feels better and is ultimately more fun, to save in his piggy bank for several weeks before spending, and that not spending it all at once insures that he is never totally broke. This is a valuable lesson in delayed gratification, a task that, if learned at a young age, will be helpful to your child in many areas of life. The child who learns that he is able to wait for things he wants is going to be a much more successful child and adult than the one who needs everything right now!
Teaching Your Child to Wait
It is very difficult, especially for younger children, to learn to wait for something they want. This simple skill, delayed gratification, is vitally important in the maturation of your child, even apart from the money aspect. A child who can delay gratification without undue stress is much less likely to fall victim to addiction later in life, for example, but the benefits extend to all aspects of his life.
One excellent way to teach this to your child is to give her a "wishes" notebook. Just a little spiral bound notebook will do. Make sure your child brings it whenever you're out shopping, or even keep it in the glove compartment in the car so it will be at the ready. When your child sees something she MUST have, tell her to write the name of the item in her notebook, along with what it costs and the store she saw it in. Tell her that you'll go home and think about it and maybe decide to buy it if she has enough money, or save up for it if she doesn't.
In this manner, your child is not simply told "no", which can feel like her wants and desires are being dismissed. With the notebook, the things she thinks are important are recorded and she knows where to find them when the time and money are right. You may well see fewer incidents of begging and tantrums with this method! But it should be encouraged for all ages, not just the little ones.
Your child might have a very long list of things in her notebook very quickly. This is all right! Soon he will learn which things are important to remember and which are just passing desires, like a candy bar he might see. It is an excellent means of teaching your child to manage his desire for "things", which is something we all struggle with from time to time.
It also teaches him to prioritize. When he has some money built up in his piggy bank to spend, he can refer to his notebook and make a decision! He will not be able to buy everything on his list, so he will be forced to weigh costs and benefits. This is a very valuable skill for his future success as an adult.
The other dollar that goes into the other piggy bank is for charitable giving. This is to teach your child generosity and kindness, and that she can make other's lives better by sharing her wealth. Pick a few charities that you think your child can relate to, and donate the money every time you reach $10 or $20.
Some good ideas would be a local children's hospital, a charity run through your church, or a local animal shelter or humane society. For the very young child, you want it to be a local charity, so that he can bring the money to the location and physically give it to them. An older child can understand that you can write a check when they give the money to you, and then you can send it off in the mail together, if you want to support a charity that is not local.
Talk to the child about what his money will be going for and how it will help those he is donating to. Your child will develop an awareness of the needs of others, and generosity rather than selfishness will be encouraged. Best of all, he will experience that good feeling you get when you help others, which is what we all want our children to know.
The Older Child and Money
As the child gets older, they will be getting more money for an allowance. Some parents make the child's allowance the same number of dollars as in their age. A seven year old gets $7, etc, The percentages that go to each account can be negotiable as the child gets older. However, it should be the rule throughout their childhood and adolescence that half the allowance must be saved in the bank. This golden rule teaches responsibility and self-discipline with money, which are characteristics that you definitely want to nurture!
If you use the dollars per age number method, the older child will probably need more funds than, say $17 a week for the 17 year old. This is a perfect time to offer "extra" work around the house that you will pay her for. Mind you, these should be above and beyond her regular chores that are expected of all household members! Maybe your teenager can change the oil in the car for you, or clean out the gutters, or plant some shrubs for you. Negotiating a fair price for the work is another valuable skill for them to acquire. But be fair! Pay your child close to what you would expect to pay if you had someone do it for you.
Your older child can also benefit from learning about investing money as a means of growing his wealth. Teaching about investing early gives your child a wider view of finances and still more skills to manage money with. If you are an investor, share this with your child and explain why you chose the investments that you have. Follow the markets and financial stats online with him and explain how the stock market works. He may even want to start investing his own money. It is a great way to learn about money management for the future.
Don't Use Allowance as a Discipline Tool
Don't be tempted to use withholding allowance from your child as a punishment. There are plenty of other ways to discipline a child who has done wrong. Using withholding allowance as a threat can turn a valuable learning experience into a battle, filled with anger and resentment. You don't want your child's concept of money to be tied to those thoughts and feelings. Unless your child's infraction has to do directly with money (for example he spent it on cigarettes), avoid withholding his allowance as a means of discipline.
Let Us Know How You Manage Allowance
Does Your Child Get an Allowance?
Modeling, Modeling, Modeling
Finally, make sure you are modeling responsible money behaviors for your child. When you are out and you see something you want, tell your child that you are going to save up for it and get it later. Make your deposits into your account at the same time as you do your child's so they can see that you are a saver too. Make donations to charities periodically, and tell your child when you do. Let your child see you modeling the money habits that you want her to learn. In this way, your lessons taught through giving them a weekly allowance will be reinforced and internalized by your child.
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© Katharine L. Sparrow, MSW
*Katharine Sparrow has worked as a psychotherapist with children and families for many years, focusing on parenting issues and behavior problems.