Teaching kids to save with allowances
Thursday, 30 August 2018
Four in five Americans say allowance teaches financial responsibility, according to a survey by the American Institute of Certified Public Accountants, or AICPA.
Ideally, allowances help kids learn about money. However, many parenting and financial experts disagree about whether they actually teach money management skills. There are also several different schools of thought about the best way to give a child an allowance.
Here are some strategies and suggestions to help you decide what's right for you and your child.
When to start a program and how much
Children should understand the concept of money and how to count it before they start receiving an allowance. Some experts suggest starting an allowance program around the age of six, while others recommend children be a bit older, around 8 or 9. According to the AICPA survey, 54 percent of parents started allowances at 8. All children are different, so use your best judgment as to when your child grasps the idea of money.
The allowance amount depends on your child and your personal financial situation. A common rule of thumb: Give a child $1 a week for each year of age, or $8 a week for an 8 year old.
It's widely agreed that less is more when it comes to allowances, as having extra money typically doesn't result in kids gaining valuable money habits.
Establishing a structure
Many parents start allowance programs with good intentions. However, when Susie runs out of money and is meeting friends at the movies, it's easy to hand her an extra $10 without considering the message you are sending.
When starting out, make the program as structured as possible based on what makes sense for your family. For example, determine what day allowances are given, what the money can be used for, how and when it will be increased, how many advances can be made a year, and what conditions must be met for the child to keep receiving the allowance.
Make sure the rules are clear, the kids understand them, and you stick to them.
Chores vs. no chores
This is perhaps one of the biggest points of contention regarding allowances. Giving an allowance in exchange for chores does teach kids money must be earned. However, others argue kids should help around the house without being paid. And what if you have a stubborn child who decides to skip the allowance in order to get out of doing chores?
A solution could be to give your children an allowance not tied to chores and pay them for work above and beyond their regular chores. This hybrid approach requires them to pull their weight around the house without being paid, but still reinforces the idea of you must work for money. It also teaches them to take the initiative and look for opportunities to earn some extra cash.
The same approach can be used when it comes to grades. Children obviously should be required to maintain good grades without being paid. However, a financial reward could be an option for special accomplishments.
What should the allowance be for?
Again, the idea of an allowance is to help children develop healthy money habits. Therefore, many experts agree the child should be encouraged to save some of the money. The "three jar" method is popular today, with kids having three jars for their money: one for saving, one for spending, and one for giving. The goal is to teach kids money isn't just for spending; saving and giving are equally important, if not more so.
Experts suggest children under 14 use allowances for things like snacks at the movies. It's also good to encourage kids to save for something special, like a toy or game.
Once the child is older and probably receiving more allowance money, it's time for them to start using that money for social outings, putting gas in the car, or helping pay car insurance.
Be involved with the program
If your goal is to use an allowance as a financial teaching tool, it's important to stay involved. In fact, most experts agree the worst thing you can do it hand over money each week with no strings attached and no input as to how the money is to be used. As long as you have clear rules and you work with your child to help them understand the value of money, how to best use it, and mistakes to avoid, your allowance program should be a success.
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