Giving kids an allowance is almost as American as apple pie. According to a 2015 T. Rowe Price survey, 70 percent of parents report they give their children an allowance. If your family is among those in which kids are given an allowance, you can take steps to elevate this common practice into a money-management lesson that may have lifelong benefits for your children.
Laying the Groundwork
Whether your child is learning to walk, ride a bike, drive a car or handle money, skill is built through practice, and often, practicing means learning from mistakes. Letting children handle their own money gives them the opportunity to develop healthy financial habits at an age when the consequences of mistakes are still fairly mild. With a little spending money at their disposal, children are allowed to develop:
- good judgment. Kids learn to distinguish between purchases with lasting value versus cheap appeal.
- forethought. Receiving pay that is regular but not quite enough to satisfy every whim encourages children to plan and budget.
- patience. Building savings to reach financial goals fosters an ability to delay gratification.
Establishing Ground Rules
How you go about paying your children’s allowance will depend largely on your financial situation and your values. Here are some general guidelines that can help ensure that giving your kids pocket money has long-term payoffs.
- When to start? By first grade, most children are able to understand the link between money and new purchases and to distinguish between wants and needs.
- How much? Weekly payments of 50 cents to one dollar per year of age may be a reasonable amount to start with. Raise the amount as your child’s financial responsibilities increase. An older child, for example, may be handed control of his clothing, entertainment or sports activities budget.
- With what expectations? Avoid misunderstandings by clearly stating what you expect your kids to cover with their allowance. Also explain what you expect in return. Some families tie an allowance to doing chores while others deem chores a natural and unpaid contribution to family life. Encourage children to divide their money into spending, saving and giving categories. This budget provides kids with a healthy financial model that they can use as adults, too.
- What about mistakes? Feeling the consequences of financial mistakes is part of the learning process. If your kids overspend, don’t bail them out. Instead, encourage them to earn any extra money they need.
Opening a savings account for your child may be an ideal way to introduce him or her to real-world financial tools while providing a safe place for him or her to stash his or her cash. Navy Federal Credit Union offers several savings account options as well as financial tools that can help your kids develop wise money habits early.