Teaching Children Financial Skills
By Sherron Lumely
In its simplest form, a weekly allowance combined with communication can help children learn how to balance savings and spending. Once children are old enough to understand the concept of money, and that occurs at about age six, they begin to develop financial habits. From this young age and throughout the tweens and teens, allowances provide money management lessons to last a lifetime.
Currently, in the U.S., one-third of Americans have no savings, according to U.S. News and World Report. A Google Consumer Survey in 2015 also found that 62 percent of Americans had less than $1,000 in savings. Today, using an allowance to teach children how to be financially successful is a much needed new spin on a familiar tradition. Although 60 percent of parents give their children allowances, there may be as many theories about the practice as there are parents. Fortunately, parenting experts and financial professionals are now tackling the question to take the guess work out of allowances for parents.
Spend, save, share
An age-old rule of thumb is to save 10 percent of income. However, a broader-minded “spend, share, save” policy is recommended for children’s allowances by author Peggy Houser, a Denver financial planner and author of the book, “How to Teach Children About Money.” She advocates dividing allowances equally between saving, spending and sharing. Thisplan recommends that allowance be divided into three parts: one-third for immediate spending, one-third saved, and one-third ear-marked for compassionate giving. Parents can help foster natural generosity in children by allowing the child to choose a charity or cause for the funds.
In February 2016, Ron Lieber, personal finance columnist for The New York Times and The Wall Street Journal released his new book, “The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.” He says good parenting means talking about money with kids, who are very aware of money and have many questions about it. Allowances are a tremendous way to help children understand the nuances of not just basic financial lessons, but also about what the family values, he says.
What to avoid
Pediatrician James Sears, consulted by Web M.D., says using an allowance as motivation and payment for household chores is not good family policy. “Kids have chores to do because they’re part of the family,” he says. Tying chores to an allowance creates an unhealthy sense of entitlement that everyday responsibilities will be paid.
Teaching children the value of work without linking the allowance to chores may seem difficult. Yet, this is increasingly recommended by family financial experts. “Allowances and family chores have different purposes,” says Jon Gallo, a family financial consultant. “Family chores are chores children do because they are members of the family.” Neale Godfrey, founder of the Children’s Financial Network, says that children’s chores should be divided into two categories. Some should be considered citizen of the household chores, and not paid.
Others fall into the category of work for pay. Neale says putting toys away would be a citizen of the household chore, but doing laundry could be a work for pay chore. Gallo says washing the car is an extra chore, and it would be appropriate to let children earn money when they do things beyond the regular household chores.
Other allowance snags to avoid include setting the allowance too low and not requiring any planning for spending. Also, starting the allowance too late may work against forming good economic habits. There is also a bit of a gender bias to avoid. Investment company T. Rowe Price found that 58 percent of boys versus 50 percent of girls say they talk with their parents about finance. Boys are more likely to believe they are good with money than girls (45 percent versus 38 percent), according to the study.
The next level
“Kids need an allowance so they can practice using money,” says Elisabeth Donati, author of “The Ultimate Allowance” and creator of money management summer camps. Two top money camps for kids include Camp Millionaire and Wall Street Summer Camp. Camp Millionaire focuses on wealth principles, including managing risk, and also offers a three-day workshop for teens called “Moving Out.” Wall Street Summer Camp includes field trips to financial districts and other hands-on applications.
Camp Startup is another financial skills camp, emphasizing entrepreneurship and business management with mock portfolios and business plans.
What allowances should cover
Allowances should be age appropriate and shouldn’t be used to cover essentials, such as food and clothing. Giving children some freedom about how to spend money on smaller non-essential items informs their experience about budgeting wisely and setting aside funds for larger purchases. Allowances should increase with age and autonomy. For example, an older child’s allowance may include enough for outings with friends, whereas younger children’s purchases will likely be made with a parent present.
Follow-through is very important. Children should know the parameters of what the allowance is expected to cover and what day of the week it will be received. An allowance is a means of teaching income management to help children prepare for the financial decisions they will make in the future, and is yet another skill parents can help their children master.