In my May 28th blog (http://thethinpinkline.com/209/05/28/allowance), I wrote about kids and allowances.  I’m a firm believer that giving an allowance is a good thing and helps parents guide their children onto the road to financial responsibility.

I received a comment and a great question from Jessica, the mother of two small children:  “I have very young children, 2-1/2 and 4-1/2, who adore candy machines and constantly want quarters from us.  So I devised a simple system of “jobs” they do daily and we mark completed on our “job board”.  After a week of completed jobs, they receive 2 quarters, and usually spend both as soon as they leave the house.  Their jobs include household chores like clearing the table, putting away their toys, and feeding the dog.  I’ve also included some social skills like sharing and saying please.  And this gives us a chance to work on personal developments like getting dressed by themselves and brushing their teeth.  So far, it’s been very successful!  They are motivated every day to check things off their job board and look forward to earning their quarters.  However, I’ve been thinking about introducing the idea of saving — maybe they put one quarter in a bank and can spend the other quarter.  Do you think I should “encourage” or “require” saving?  I have to admit their father and I are not good savers and I would love for the boys to learn better habits.  I’m just afraid they are still too young for it to be effective.”

I thoroughly agree with what Jessica is doing with her two little ones and think her method is solid.  But want to again acknowledge that money specialists are divided about whether allowances should be tied to chores.  Some (like me) think it’s important that children see the value of work to earn money.  Others think chores should always be done as part of the family needs – separate from the allowance.  And then there are those who advocate putting a value on specific chores.

As for the idea of introducing savings – my answer to you, Jessica, is – absolutely!  I believe that savings should be required.  I believe that the concept of savings is mandatory otherwise your children will only know that what they “earn” can be spent as you indicated:  “They receive 2 quarters, and usually spend both as soon as they leave the house.”

I’m furthermore very impressed by your honesty regarding:  “I have to admit their father and I are not good savers.”  Not many adults would admit to that, Jessica.  That admission is really key because children learn their money habits (as they do other habits) by watching and imitating their parents.  Although your children are very young now, they will tend to carry the money messages they learn at this early age – with them into adulthood.  So, no, they’re not too young for the message of saving money to be taught right now.  Here’s how:

Give both of them three clear plastic or non-breakable glass jars and help them label them savings, sharing and spending.  Then explain that you are giving them a raise of ten more pennies to 60-cents a week.  Tell them what a raise means:  “Mommy and Daddy think you’ve both been doing such a ‘good job’ with your jobs - that we’re giving you a few more coins every week.”  Jessica, this suggestion of a raise is really just so they can potentially and more easily see and give equal 20-cent amounts to each of their jars.  Then talk to them about:

• Savings.  “It took Daddy and me a whole year to save for xx.”  Show them a calendar, turn the pages of the twelve months that make up a year being sure to mention special things that happen during that period of time – birthdays, special holidays and so forth – to give them an idea of how long it takes to save money.
• Sharing.  “The money in this jar is what you use to help other people who are having a hard time right now get something they really need.“  This gives you the opportunity to begin and continue conversations about the difference between wants and needs.  I told my grandchildren that if they want something, they will need to pay for it from their piggy bank but if they need something – which means something that I agree with them is important – I will help them pay for it or even buy it for them.
• Spending.  “You get to buy whatever you want with your money – if you have enough.”  This allows you to explain the value of items that they have just been used to getting and introduce the choice NOT to spend anything sometimes – which takes you back to another conversation about choosing to save and another opportunity to show by example why always saving some money is very important.

Thanks for your comment, Jessica.  I hope these suggestions work and that you and your husband will show the children – by your example – that saving money is now absolutely part of your family’s plan.  Among money specialists, we refer to this concept of consistently saving as paying yourself first meaning you always put away a portion (however modest) of any money you earn or get – into savings or retirement (and into both if you can).

Here’s to your health and wealth!

TAGS: allowances, children and money, saving money

As far as I’m concerned, it’s never too early to learn how to manage money.  Just ask my 6-1/2 year old grandson Morgan.  I started having conversations with him about money when he was a toddler and started saying:  “I want.” 

Those early little chats started with semantics.  I’d ask:  “Morgan, do you need that or do you want that?”  And I explained the difference between a need and a want:  a need was something I agreed was so important that I’d help him get it (aka buy it for him); a want was something he’d like but didn’t have to have  so his piggy bank would need to pay for it.

Repetition worked.  And as he got older, he came to understand that repetition was just another word for consistency when it came to money conversations with me – Grandma GoGo.

Which brings me to the subject of kids and allowances.  True – there are different schools of thought when it comes to giving a child an allowance.  But it’s a conversation that happens in just about every household whether the family income is large or small. 

Many people believe an allowance is an essential stepping-stone to learning the value of money.  Others don’t agree.  As a financial journalist, a mother and grandmother of two young children (Morgan’s little sister Savannah is my other grandlittle and she’s 2-1/2) I believe allowances allow parents to help guide their children onto the road to financial responsibility.

Every household will have different ways of approaching allowances, but if you choose to accept the “give them an allowance school of thought” - there are some concrete ways manage allowances successfully.

So how do you get started?  The best time to introduce the idea of an allowance is when your child can count dollars and coins and understands the concept of prices.  Some money specialists say this is usually around 5 or 6 years old. 

Then the big question is – how much allowance should you give?  The answer is – there’s no one-amount-fits all suggestion – although lots of studies say the rule of thumb is a dollar for every year of age.  That might not be appropriate for everyone and it also depends on the frequency of the allowance – which I suggest be weekly because then there’s a consistency and continuity to the money management lessons.

Some things to consider when deciding how much:

• Your child’s age.  You want to make sure to give room for increases as your child gets older.  So be careful not to start with too high a number for younger children.
• Your family income.   The only way to teach financial responsibility is to practice it.   Your child’s allowance must fit within your family budget. 
• What the allowance will pay for.  If you expect your teenager to pay for his or her clothes with their allowance, you might consider a higher amount than if you will continue buying their clothing for them.
• Before handing over any allowance money – teach the money basics.   Discuss the difference between needs and wants, saving, spending, investing, donating, and of course – earning. 
• Encourage your children to keep records.  Help them get a better understanding of their allowance money “activity” by having them keep a simple accounting of what’s spent (and hopefully what’s saved) in a notebook.  You’ll be able to use that to “show them the money” lessons when needed to make your point and/or to congratulate them on good management.
• Give allowance in denominations that encourage saving.    For example, for $5 give five one-dollar bills and suggest that at least $1 be set aside for savings.  Then explain that if they chose to save all their allowance, $5 a week at 6% interest compounded quarterly will total about $266 after one year and $3,527 after ten years.  For some children, this straightforward information about what they’ll later come to know as the magic of compounding – will cause the savings bug to bite.

As for whether allowances should be tied to chores – money specialists are divided.  Some think it’s important that children see the value of work to earn money.  Others think chores should always be done as part of the family needs - separate from the allowance. And then there are those who advocate finding a way to blend the two by putting a value on specific chores.

However you decide to teach your children about money through allowances – good for you!  The fact that you’re introducing the concept of earning money is a big step towards growing their financial knowledge.

Here’s to your health and wealth.

TAGS: allowances, financial responsibility, Kids and money, needs and wants