From small allowances for young children to bank accounts and credit cards for college students, parents have many questions and various beliefs about how to try to teach their children about money. Like most parenting issues, the key to success is to have a clear sense of purpose about what you are doing and to involve your children in the decision-making.
Let’s do this chronologically. With preschool children, don’t even bother. Just pay for things as you go along. The issues are too abstract for most very young children to grasp. In fact, I wouldn’t begin to address “paying” children until at least age 8.
Let me quickly discard a couple of popular methods for giving children money. I don’t believe in paying children to do routine chores or for earning good grades. Helping around the house should be seen as a family responsibility, not a way to earn money. In fact, I usually recommend that parents do chores with their young children. It’s much less hassle and allows for some bonding.
Back to money. The word “allowance” would seem to imply that the money given to the child will allow the child to make purchases. Is it in fact “free money”? Can the child really spend it on anything? Should the child have to save some of it or give some of it to charity, two things that parents often see as part of teaching children about money? Of course, all this gets tied into the big question: How much to give?
The answers to all of the above vary according to the age of the children. In the beginning, (whether you start at 8 years old or earlier), my suggestion is that a small amount of money should be given with no strings attached just to allow children to begin to experience the sense of having their own money. Don’t give it with lectures. Just say you are giving them a couple of dollars each week that they can spend on whatever they would like (exceptions to that should be clarified, e.g., if there are foods that cannot be eaten for health reasons or toys that are not acceptable). It’s interesting to observe this unfettered opportunity and note differences among children. Most will spend the whole amount on goodies of one sort or another. Some will actually hold onto some, even all of it.
Negotiate Some Financial Responsibility at Age 10
As the children get a little older, probably about 10, this is a good time to begin to negotiate financial responsibility. Have your child create a list of nonessential expenses. I think this is too young to have children manage clothing allowances and including lunch money in allowances makes no sense to me since you have to give them that money anyway. Ask them how much they think they need or should receive. Again, parents are often surprised when children don’t ask for unreasonable amounts of money. Then, again, some have no clue. How much you actually give will be influenced by a few factors, including family finances, your own spending pattern (parents often fail to recognize how much their “objective” decision about allowances is actually based on their personal attitude about money), and awareness of what your peers are doing. On this latter point, you generally want to try to come close to the median, i.e., about the midpoint of the most frequent amounts your child’s friends are getting, not too low, not over the top.
I don’t think you should require savings or charitable contributions. Hopefully both of those issues may come up naturally. It is much better than to simply take away from what you are giving. That teaches a child nothing except that you have negotiated a financial arrangement that isn’t really honest. What I mean is that to tell your child “Here’s $5, but I’m making you put $1 in the bank and give $1 to the church” really means you are simply giving the child a $3 allowance!
With so much media attention given to tragedies, children are more conscious than ever about the misfortune that befalls many in the world around them. There are lots of wonderful stories of children contributing to fundraising causes. It is so much more meaningful for your child to offer to donate part of his allowance out of his own desire to help someone than to simply be making an automatic donation that has no real connection to the child. For those parents whose child doesn’t offer to do this spontaneously (actually even with the children who do), parents should be discussing their own charitable giving, including who you give to and why and how it makes you feel. But don’t force giving. If you model it and explain the values embedded in it, most likely your child will be charitable at some point in his life.
Saving may also appear spontaneously. Your child may want to buy something that costs more than her weekly allowance. That provides a wonderful opportunity to explain how she can accumulate the money she needs to make the purchase. It also provides a chance to share some examples of how parents save for more expensive items that can’t be afforded from monthly income. Of course, parents have to actually do some saving to model it!!
Teach them to Live on a Budget
Around 12 or 13, I think there should be a substantive change in the concept of allowance. This should be the beginning of meaningful lessons about managing money. Now is the time to actually work on a budget with your child that includes essential items such as clothing and entertainment. Obviously this coincides with the age when most children become obsessed with clothing, music, and video games.
This is an opportunity to introduce checking accounts and the wonderful replacement for credit cards, debit cards. Never, ever give your child a credit card, even as a college student. It has always been a source of significant financial crises. Adults have enough trouble managing the concept that you will actually have to pay for what you just charged. Most teens and young adults will screw up here. But debit cards have clear limits. You need to have the money in the account (or become overdrawn and pay penalties). The potential risk is so much less and the management skills required provides a solid foundation for the future.
There are many challenges faced by parents at this stage. Are you really going to allow your child to make her own decisions? What are you going to do if she spends too much in one area and lacks money for a new winter coat she really needs?
Once again, these issues need to be addressed ahead of time. If you are going to retain some control over what video games are acceptable or how much skin can be exposed by the clothes that are bought, discuss this upfront and work out a process for giving approval. But don’t control too much. The expectation should be that your children will make mistakes (we do) and you want them to learn from their mistakes rather than try to prevent them. You may tell them that you will help them once (or twice) each year if they get messed up but that’s it. You should also take responsibility for an occasional big ticket item that would strain their budget but is something important (e.g., a suit or dress needed for confirmation). Of course, that can simply fall under the category of a gift.
When negotiating the amount of the allowance, take into account money the child does or can earn as well as the role of gift money for birthdays and holidays. You should also teach the child how to balance his checking account, an important skill that too many adults lack (or just fail to do).
Should Children Invest? Yes
As you can see, the process of teaching children financial responsibility often forces parents to address their own financial responsibility… or lack of! Which leads me to my favorite money issues and what I believe, in the long run, is the most important part of teaching children about money: Investing.
Yes, you should get your children into the stock market. The earlier the better. Preteens and teens can be enthralled with the idea of becoming a millionaire, which is relatively easy to achieve if you invest earlier in life. Since many 12-13 year olds come into some money for confirmations or bat or bar mitzvahs, try to convince them to buy some stock. There are ways to do this inexpensively. Let the children buy familiar companies. Some will do remarkably well. Of course, they will also learn to deal with the ups and downs of the market or of a specific company. But this is the cornerstone of creating true long-term financial security.
It is a shame most schools don’t teach this, although virtual investing competitions are growing rapidly. But there’s nothing like owning a stock such as Hot Topic, where your daughter may buy her favorite clothes, or Electronic Arts, a video game company. Of course, there’s always Disney and McDonalds as well as many companies your teens may know about that you might do well to invest in also! Before long your teen is grabbing the business section before you get to read it and you have started your child on the road to understanding how to use money to make more money.
We’ve just come a long way from giving a young child a few dollars a week to begin making simple decisions about spending. But you now can see how this becomes an initial step in a process that can truly prepare your child to understand all the complexities, good and bad, about managing money. It is so central to our security and quality of life. Yet few families lay the type of foundation that gives their children the knowledge and experiences that will increase the likelihood that they will be money managers rather than money mismanagers.
But there is another very crucial aspect to this entire issue. Most parents spend too much, save too little, and have too much debt. Less than half of all families own stock and of those that do, the median amount is only about $23,000. So it is my hope that parents who take the responsibility of teaching their children about money matters seriously will be forced to address their own money issues first. Remember, children will model what they see more than what they are told.