June
29 - 2012

Using Allowances to Teach Kids Financial Responsibility

By the time a child is old enough to receive an allowance, he is old enough to start learning how to be financially responsible. An allowance could be the perfect tool to teach children that money is earned, rather than given to them, and it should be managed with care. Holding children accountable for money helps them appreciate the value of dollars and the power they can have as a result of managing it well.

Each time an allowance is rewarded, parents should have a conversation with their children about how the “income” they are earning will be spent. At least half of the allowance should be set aside for a “savings.” This could be a physical place where money is stashed or a real bank account that parents have set up for them. Children who start the practice of paying themselves first at an early age will continue this habit most of their lives. This is one way they protect themselves from hard financial times. You should also set priorities with your budget, such as funding a college or a custodial account for your kids, and saving for your own retirement.  This is an important lesson your kids will learn as well.

The remainder of the allowance could be divided into a pocket cash fund, a gift fund to buying presents during holidays and a charity fund to give back to the community. Although some parents to not think of charitable giving as a form of financial responsibility, it certainly helps to build a consciousness about civic duty. Children learn this directly from their parents’ charitable habits.

A good rule is for parents to pay for necessities like school supplies, school clothing, food and medical care. Children should pay for any other goodies beyond the scope of basic necessities with their allowances. If they are pressed to have to determine where to pull money from in order to afford their own entertainment or luxury items, they will give unnecessary spending a second thought before they do it.

If young allowance managers ever do get in a bind with their money, it is probably a good time for parents to teach the importance of taking on extra work to earn more money. Any reasonable chore around the house, tutoring for a younger sibling or dog sitting are good ways for kids to earn extra income. It is beneficial to parents who may not have time to complete extra household chores, but it also teaches a child what he must endure to earn extra income.

Beyond the actual money that kids receive for an allowance, there are plenty of other ways for parents to teach their children about how to manage money. Teaching kids early what it means to balance a checkbook helps them better understand how their parents manage money for the family. Children who are able to physically see how money has been allotted for the family budget have a deeper respect for their parents’ financial means. They are more informed about what their parents can afford and what is out of range of the family budget.

Keeping kids in the loop about family finances should also involve allowing kids to contribute to the conversation about savings. Make the idea of saving money a family topic that they can participate in. Because young minds are so full of possibilities and do not yet believe in too many limitations, they may have the power to move the conversation beyond coupon clipping. They may have definite savings ideas that their parents have not allowed themselves to imagine.

The idea of financial responsibility is one that always begins at home. Children tend to imitate both the good and bad habits of their parents. If a child learns early to pay bills on time, pay himself, budget for fun and entertainment and give to those who are less fortunate, he learns to be a well-rounded citizen. Money is a primary method of exchange in the current world. The sooner a child learns how to deal with money responsibly, the sooner he secures his own future. This lesson is one of the best gifts a parent can give to a child.

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