Giving Children an Allowance
by Mia Jensen
This one is a hot issue for most parents because there are so many different opinions on whether or not children should be given an allowance at all, how much to give them and whether they simply receive their allowance or work for it in the form of household chores. There is no right or wrong way to go but it's worth considering the options and developing a strategy that suits your individual family.
There's no doubt that one of these days, if not already, you'll hear the ring of "Can I have pocket money?" or "Why don't I get pocket money like my friends?". At least in exploring your options in advance you can be prepared to discuss the issue after having given it some serious thought.
Benefits of giving your child an allowance
Giving children an allowance provides an opportunity to learn about the value of money and how to manage it. This is an essential life skill that unfortunately too many young people are lacking as they grow and move out into the world. Learning about money cannot be learned any other way than by handling and managing it.
It will no doubt increase your child's competency with mathematical concepts in general, as money management teaches an understanding of value, counting, measurement, addition, subtraction, multiplication and division and much more. At a young age this will be through experience and experimentation. Have you ever seen how involved children get in counting their pocket money - sorting it into same-value piles, figuring out different ways to make $1, comparing their saving with their siblings, and so on? This is valuable hands-on learning. Compare that scene with the teenager at the supermarket who struggles to work out what change to give without the aid of the register doing the calculating for them. Children need to feel money and handle it. Learning about money at school doesn't make it real and valuable to the child. They need to be able to make decisions about it and learn to budget through necessity rather than theory.
Providing children with an allowance creates opportunities to set up good habits with money from an early age. They'll discover that everything has a value, giving them "shop smarts". They will soon understand why they so often hear a negative response when they ask "Can I have that?" This is also a big help in terms of the advertising that bombards children - they'll soon become wise to the ploys of those advertisers.
As children get older, their level of financial management will increase as their goals increase. They will have short and long term financial goals requiring more decision making and planning. They will learn to balance their needs with their desires. They will explore more options, calculate percentages and savings on specials, compare values between stores and so on, because they want their dollar to go further.
How much should my child receive?
Your child's allowance will probably be based upon factors such as the age of your child, your financial values, your own financial situation and what the allowance will be used for.
Setting your child's allowance at a 'comfortable' amount will provide them with at least enough to make small purchases but not enough that they never have to think about budgeting or waiting for something they may need to save for. For instance, giving such a small amount that your child has to save for weeks just to afford a small item will not encourage them to engage in managing their money with any excitement or interest. On the other hand, setting the allowance too high removes the need to make financial decisions and work to manage their money. A large part of having an allowance is learning to make decisions so the amount you decide to give needs to allow those decisions to take place.
Consider the age of you child and don't expect to give the same amount for all children in your family. Starting with the younger children, when they start showing an interest in money and being curious about its value, this may be a good time to start their allowance. At that age their biggest decision may be which flavour lollipop they will choose, but it is still a choice and introduces the notion that all items have a value or price. As your child grows, the allowance should grow too, as they will desire more costly items and will gradually increase in their ability to manage money.
One of the best ideas I've heard for setting an amount is to determine an amount per year of age. This may be 50 cents per year so your 8 year old, for example, would receive $4 per week. You may decide $1 per year of age is more appropriate. The amount you set would be based on your own financial capabilities but it saves any squabbling about fairness between siblings. It also adds an extra element of excitement each birthday as they get an increase in their allowance!
Some families don't give a regular set amount but base the allowance on the number of chores done by the child, some of which may have different values. See the 'To chore or not to chore?' section below.
How often should my children's allowance be paid?
Children don't have a lot of patience, especially when young, so a weekly allowance is probably best and will keep them active in handling and managing their money. As they get better at managing their money and setting and following budgets, you could extend to fortnightly. Setting a monthly allowance for teenagers may challenge them to become expert money managers because they will be sure to blow all their allowance quickly at first but will soon learn to value budgeting if they want to go to the movies with their friends in week three for example. Of course these decisions are up to you and what works best for you and your family.
What about banking?
At some stage you may wish to introduce banking. It's fair to give a percentage of the allowance as cash-in-hand and require that the rest be invested in a bank account. This introduces an understanding of how banks work as well as a habit of saving a portion of income - invaluable as children gain independence and enter the workforce. Will that money in the bank be saved for larger purposes and long-term goals? Will it be an ongoing saving plan for the future? Will the child have full control over what that money is spent on or will they need to confer with mum or dad? These are tough decisions for all parents. Once your children are old enough to negotiate it may be worth sitting down and making those decisions together.
It may come down to how much of the child's allowance is put into the bank. If it is a large portion, it may be fair to allow at least some of it to be saved for larger purchases. You may wish to set a minimum balance so that the bank account isn't emptied every time a larger purchase it made. On the other hand if the goal of the bank account is to set up a lifelong habit of savings, then the '10% rule' may be what you're looking for. Financial advisors say that people of any age should get into the habit of saving at least 10% of their income as savings. The goal may eventually be the child's first car or a deposit on their first home...or beyond. Once that habit is formed there is a greater chance of it continuing so once that 'child' has their first home they would (hopefully) continue their savings habits on into retirement.
You may decide to set up two bank accounts - one for lifelong savings and one for the child's longer term financial goals. However it may be even more beneficial to have these two goals set up within the one bank account. You can teach your child to keep financial records so they can see how much of their balance is the 'non-touchable' savings and how much they have to work with for their own goals.
An alternative to banking with a financial institution is to create a family banking situation whereby the parents become the 'bank'. You will have to ensure good records are kept and be prepared to respond to requests for withdrawals, however it could be a good introduction to the concepts of banking such as deposits, withdrawals and savings.
Being prepared
When you start to give an allowance, make sure you take time to think out the particular such as which day will be 'pay day', where the money will come from and how you can ensure you have the right money to give. There is nothing more frustrating to a child than telling them that you don't have any change on you when it's allowance day. This disrupts any plans they may have made and even if there are no immediate spending plans it will dampen the child's enthusiasm. It's just as important for the parents to be organised in this respect because missing one week's allowance soon leads to missing more weeks and before you know it there really is no allowance set-up. The child misses all those valuable learning opportunities.
My suggestion is to keep an allowance tin. Each day add any coins from your purse or wallet, including some smaller notes. If you build this up you will never have to worry about not having the money. You are also able to give the allowance in a range of denominations which helps your child explore many coins and notes. For example, if your child's allowance is $5 per week and you always give a $5 note, your child won't become familiar with any other notes or coins. Even if your child's allowance can only be given in coins, having some notes in your allowance tin will enable you to change some of their coins into notes, again giving them a range of denominations to work with. It also makes it more feasible for them to take their allowance to the shops so they don't have to drag along a bag full of small coins!
Should I have a say in what my children spend their money on?
Another tough area to consider, this one requires a lot of patience from the parents. If children are to learn by experience, then it makes sense to allow them as much freedom as possible. Many of your child's early financial decisions will be unwise and based on quick gratification. This is to be expected. However, they are still learning about the value of money and getting used to exchanging money, receiving change, and so on. As your children age, they will start to experience cause and effect in relation to their expenditure. What seemed like a great idea at the time may lead them to regret their actions when they are left with something they realise isn't as much value as they thought it would be and now their balance has greatly reduced and they need to build it up again. Those opportunities for making mistakes will be the greatest learning opportunities.
One area where it's quite common to put your foot down is food and lolly purchases. Many parents will set a rule of no spending on lollies or other food and this will be based around your general values in regard to such things.
Another consideration develops in the teen years. As your child gains greater independence and a higher allowance, you may need to negotiate what necessities your child will need to purchase out of their own allowance, such as personal grooming items, clothing and so on. Some parents consider it their role to continue to purchase those items for their children until they leave home or get a job. However, others may decide that any personal tastes regarding such items be covered by their child, such as particular brands of clothes and other more expensive choices - being 'fashionable' to the child rather than the 'basics' they used to be.
To chore or not to chore?
As mentioned previously, some families provide a list of chores and allocate values the child can earn based on which ones they do each week. While this option sounds good in theory, it often backfires and creates a feel of resentment or frustration when chores aren't done even with the monetary incentive. There can be a constant struggle between child and parent when the child considers the chores optional (e.g. if they want the money they do the chore) and the parent really wants those chores done no matter what. Somewhere in this theory, the original intentions of learning about money are lost, let alone the feeling of harmony in the family. Don't despair, there is a compromise.
Without branching off too much into family values (which would be a whole different article), consider the idea of a family functioning with all members putting in a reasonable effort and having set responsibilities. Removing the money issue from family responsibilities teaches the child to value being an equal participant in a family. Again the responsibilities will be dependent on the child's age and will increase over time. These are simply expectations you have as a member of a family and may include things such as making their own bed, tidying their room, picking their clothes up off the floor, putting their washed clothes away, and so on. You could also allocate a particular chore for each family member such as someone to regularly take out the rubbish, someone to sweep the kitchen floor, someone to feed the pets, etc.
Now comes the interesting part. You can still have additional chores offered for set values. Just ensure that you do not expect the child to do these chores. The offer is there and perhaps from time to time your child will want to boost their income for a special item they are saving for. On the other hand you child may be an opportunist and take any and all opportunities to increase their income by doing additional chores. The choice should remain in the hand of the child. Examples of additional chores might be things like washing the car, mowing the yard, vacuuming the floors, raking leaves, hanging out the washing, etc.
As you can see, there are many decisions to make around the concepts and practicalities of giving children an allowance. However it really is worth the effort to introduce your children to real world situations and opportunities. You may be setting them up to become the next great entrepreneurs of the world. Or even more importantly, they will be competent financial managers of their own life and family when they leave the safety of your nest.