Financial Literacy Starts Early: The Ins and Outs of Allowances
April is Financial Literacy Month. In honor of this important month devoted to increasing financial knowledge and increasing the recognition of the importance of financial empowerment, I have updated a post on allowances and included some additional resources for parents.
Allowances - to give or not to give? And if so, how?
My husband and I went back and forth deciding whether or not to give our girls allowances. The main sticking point was that we did not want to pay our kids (or train them to expect payment) for cleaning up after themselves and contributing to the family. At the same time, how many of us work for free, you know? The other thing that delayed us was deciding on all the details (e.g., How much to give them? For what?). Eventually, with my oldest turning eight last year, it seemed time to take the plunge…
After some research and discussion, we decided that an allowance in our family would be a tool to teach our children about the value of money and money principles, and would not be tied to their regular chores, with a major caveat. We told the girls that cleaning up after themselves and doing their daily chores is considered the bare minimum and that their allowance is considered an “extra” privilege. So, if the minimum level of cooperation is not achieved in a given week, there would be no “extras” that week, including allowances (this "threat" seems to work as we have only held back their allowances twice in the approximately 24 weeks since we started giving them allowances). Having a daily routine task list has helped a lot with making the girls' basic responsibilities very clear. Download a sample daily routine task list here. This sample list is for a child that can read. For a younger child that is not reading yet, I recommend creating a list of their daily routines using pictures to represent each task. For example, a toothbrush to represent brushing teeth, clothes to represent getting dressed, et cetera.
We explained to the girls that they were getting an allowance to help them learn about money (and to save us from being constantly asked for things. Ha.). In determining how much allowance to give them, we followed the rule of thumb most often cited in the articles I read, which is $1 corresponding to each year of the child’s age. In other words, our eight-year-old receives $8/weekly, and our six-year-old receives $6/weekly.
At first, I balked at these figures, as it seemed like way too much money to give young kids each week. However, most of the articles I read made the point that in order to be an effective learning tool, an allowance has to be worth something. The common messages about allowances that I found in my research include:
- Start giving an allowance as soon as your child is old enough to grasp basic ideas about money and saving (e.g., ~5-6 years old).
- Choose an amount that works for your family budget, but make it as high as possible (within reason), and make the allowance correspond to your child’s age.
Obviously, having enough extra money in the family budget to even consider an allowance is a privilege. So, while most articles used the $1 per year of age rule of thumb, any amount would work, whether 25 cents per year of age or 50 cents per year of age, et cetera. Decide what makes sense for your family and know that most kids (some sources say as high as 70%) get some kind of an allowance.
Because it is important to us that the girls learn about the value of money, as well as basic principles of saving and philanthropy, upon receiving their weekly allowances, they divide the money into three equal parts: spending, saving, and donating. We use labeled mason jars for storage, as seen in the picture above. As a side note, several folks have asked where I purchased the mason jars: the jars are from Michaels (you can find them in glass or plastic - we went with glass), the lids are from Amazon, and then I made the labels with my label maker, but you could use any kind of labels you prefer.
The girls are allowed to use their spending money on anything they choose (within reason). We simply hope that they learn from their mistakes if (probably when) they waste all their spending money on candy. My daughter did this once and then she was over the thrill.
We have more restrictions on the saving money. The girls decide what they are saving for and write down the item and the total cost on a piece of paper that they keep in their save jar. This helps them keep their goal in mind as they work towards it.
In terms of the donation money, at the end of each month, the girls decide where they want to donate the money from their donate jar. On several occasions, my daughters have decided together to team up and pool their money to donate to their elementary school, a book donation drive for local children, and to an organization that works on homelessness issues. My youngest daughter has decided to donate to an animal shelter next. If you are looking for a good, easy tool to spark your family's discussions about giving priorities, check out this great, short New York Times article "How to Make A Personal Plan for Giving" by Carl Richards, and download the Guide to Giving Worksheet.
We have been doing our allowance experiment for about six months now and it is going quite well. The girls have saved up for “big” purchases a few times. Each time, they have been exceptionally proud and excited to buy themselves something special with their own money that they had saved. The girls have also experienced a lot of joy and satisfaction from their donations. Overall, this beginning financial literacy exercise has prompted many good questions and interesting family discussions.
For sources and additional information, check out the following:
- Slate article by Ron Lieber - "You're Doing Allowance Wrong" (the author’s book, The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money, looks like a great resource as well)
- CNN Money article by Kathryn Vasel - "The best way to make kids smart about money"
- Market Watch article by Catey Hill - "5 mistakes parents make when giving kids an allowance" (as a helpful guide, this article includes average pay by parents for specific tasks-e.g., laundry)
The Journal of Consumer Affairs, Special Issue on Starting Early for Financial Success. Eds. Margaret S. Sherraden and Michal Grinstein-Weiss.
Happy spending, saving, and donating!
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