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How to Use an Allowance to Teach Your Kids About Money

Author: Michael Smith

When you first met your bundle of joy, you probably had no idea that you would have to teach them every important life lesson. This includes money management. As parents, it is crucial that we prepare our children with the financial wisdom and good money habits they need to survive and thrive as adults. One way to instill strong financial knowledge and skills into children is by giving them an allowance.

Kids Learn About Budgeting

An allowance gives children spending power. If they have earned their allowance, then they should be able to freely spend a portion of it on what they like. Expect your children to make poor spending choices sometimes. When they waste their money on foolish purchases or junk food, it is all part of the lesson. They will quickly learn that wasting all of their allowance on cookies or cheap toys does not bring them satisfaction the way that saving up for a better toy or event would. The lesson they learn through experience will stay with them longer than any lecture a parent might give them.

Kids Learn to Comparison Shop

Many individuals do not know how to properly comparison shop to save money. It is common to just walk into a store and purchase the item that is wanted without wondering if the item could be bought elsewhere for a lower price. By simply taking a few minutes to look up that item's price online, alongside possible coupons, it is easy to save as much as 50% on an object. Use your child's allowance to teach them the basics of comparison shopping. If they want a new bike, don't just take them to one store and let them pick out a bike that fits in their budget. Instead, show them the possibilities that can make their allowance stretch further. Take them to different stores to compare prices and sales, and also show them how to research different prices and reviews online. You can even teach them about the cost-saving benefits of buying used items.

Kids Learn to Save

Everyone knows how important it is to save money and to be diligent in saving money each month. However, a large percentage of the population does not save money. A NeighborWorks America survey reports that 34 percent of adults in America – more than 72 million people – [say] that they don't have any emergency savings. Becoming a diligent saver goes beyond head knowledge, it is a habit that needs to be practiced until it becomes second nature. Making your child put aside 10% of their allowance for savings each paycheck helps them create a habit. The goal is that your child will enter their teenage years and adult years and carry that savings habit with them. They will automatically set 10% or more of their paychecks aside and learn to live off the remaining funds. (For more, see Opening Your Child's First Bank Account.)

Kids Learn the Difference Between Wants and Needs

Once your child starts to earn an allowance, it is important to stop buying them items they want outside of birthdays and holidays. They need to learn that they can't always get what they want the second they want it. They need to work for them and save up for them. Kids also need to learn that there is a distinction between their basic needs and their elevated needs.

Shoes are just one basic need that parents should buy for their children. The problem occurs when children think their basic need for shoes should also satisfy a want. For example, their need for quality shoes can be met for under $20-$40, depending on their age. However, when a child wants a cool pair of $100 basketball shoes that everyone else at school has, that is when their needs get confused with their wants. In this situation, you could let your child know that you would give them $40 towards the shoe of their choice. If they want the $100 pair of shoes, they would be responsible for the remaining $60. These situations help children to stop and think, Do I really need this? Do I really want to spend all of my money on this? (For more, see Teaching Your Child To Be Financially Savvy.)

Kids Learn About Giving

Incorporate giving into allowances to teach your child about charity and compassion towards those in need. This will be easier to teach if you regularly donate a portion of your paycheck to charity or tithing. If you don't, you might want to start before requiring your children to set 10% of their earnings aside each week. Children are very visual and tactile, so it is good to donate their allowance in a way that they can understand. Instead of putting the money in an offering plate or sending it away to a charity, look for ways that connect your child to the person benefiting from their donation. Here are just a few examples:

  • Help serve a meal at a homeless shelter (while donating the money to help pay for the meal)
  • Buy Christmas presents for kids in need
  • Support a child or family in a different country
  • Adopt an animal at the zoo

Exposing your child to wonderful giving opportunities helps them to be less selfish with their money. What good is an excellent saver who has a stingy and greedy personality? Teaching kids to give regularly brings balance to their money management skills as well as their overall sense of ethics.

What Should You Give an Allowance For?

Some experts warn against giving an allowance for jobs that you expect your child to do. For example, your child should do their best at school and complete basic chores without expecting to be paid for it. That is their contribution to the family, similar to the way in which parents make meals, do chores, and more without the expectation of a paycheck.

Sit down as a family and make it clear what is expected of your child. Let them know what their baseline chores and responsibilities are and the consequences for not accomplishing them. Second, let them know their weekly chores that will earn allowance, and how much they will earn each week for successful completion of their duties. Finally, consider having extra jobs available for kids that are trying to reach a savings goal. (For more, see Use Allowances To Create Financially Sound Kids.)

The Bottom Line

Allowances will always be debated about among parents. There are so many great lessons for kids to learn through receiving a regular allowance, though, so consider them all carefully. Choose what works for your family, and remember that the most important money lesson you teach your kids is how you manage your own finances. They will learn through your example.

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