Teach Your Kids Financial Literacy
By Tanni Haas
Most parents give their kids a regular allowance; some a few dollars a week, others substantially more. But is that advisable and, if it is, at what age should you start giving it to them and how much should you give? How can you use an allowance to make your kids more financially literate?
Teaching Financial Literacy Experts agree that an allowance can teach kids important lessons in financial literacy, such as how to save for things they want, how to budget their money, and how to choose between competing spending goals. Brad Munson, a financial literary expert, says an allowance “is a great way to teach kids about the real value of money, how to be organized and responsible, and how to plan for the future.” Financial counselor Ray Martin, who’s the author of several books on financial literacy, adds that an allowance is a great opportunity for kids to experiment with money and to learn from their mistakes. “It’s a way for them to learn big lessons with small amounts of money at an early age.”
It’s important that you talk to your kids about the value of money, and it’s best to do so in the context of an actual allowance. Marty Allenbaugh, a certified financial planner, says that talking to your kids about money without giving them an allowance is like trying to teach them how to play the piano without ever letting them sit at the keys.
Research shows that giving kids a regular allowance while discussing with them the importance of money makes them more financially responsible as adults. They become, as Evonne Lack, a financial literary expert, succinctly puts it, “less likely to arrive on your doorstep years from now with a duffel bag full of dirty laundry and a mountain of credit card debt.”
When to Start If an allowance is such a great tool for making kids more financially literate, at what age should you start giving them one? Many parents start at age eight, but experts agree, as Martin puts it, that it’s the kid’s “aptitude not the age that really matters.” So how do you know if your kids are ready to receive and learn from an allowance? Research shows that they are ready to benefit from an allowance once they’ve reached certain developmental milestones:
1) they understand that money can be exchanged for things they want;
2) they can confidently add and subtract.
And, here, kids differ widely. While some kids reach these milestones at age four or five, others get there by age eight or nine. “So if your child tends to shrug at money, losing it before it can find its way to his dusty piggy bank, hold off until you see signs that he enjoys saving it or thinking about how he might use it,” says Lack.
How Much to Give Finally, what amount should you give your kids? Experts agree that, as a rule of thumb, you should give them $1 per year of age on a weekly basis: for example, a six-year-old would receive $6 a week and a ten-year-old $10. The advantage of this approach is that kids get an automatic raise every birthday, eliminating the question of when their allowances will be increased. It may even reduce sibling arguments, because the younger kid will understand why the older siblings get more.
Parents should feel free to deviate from this rule of thumb, depending on whether they live in an expensive or inexpensive area, their particular financial situation, how many kids they have, and which regular expenses they or the kids are expected to pay for. As Susan Borowski, a writer for the website Money Crashers, puts it, “If a straight $5 or $10 per week (or even per month) makes more sense to you than paying a dollar per year of age, then pay what works for you.”
If your kids are very mature, you can discuss this issue with them and reach a mutual agreement on a reasonable amount. It’s useful to go through such a process with your kids, says Martin, because it “helps to develop budgeting skills, teaches responsibility, and prepares them for the realities of personal money management.”
However, the allowance shouldn’t be too high. If you give kids too much, they won’t learn how to budget and allocate money because they never get a chance to prioritize among competing spending goals. Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money (Harper, 2016), says to “give your kids just enough so that they can get some of what they want but not so much that they don’t have to make a lot of difficult trade-offs. Let them own those, so they know what it’s like to make financial decisions that resemble grown-up ones.”
Whatever amount you ultimately decide on, make sure to follow a consistent schedule—whether weekly or monthly—and stick with it. As Mary Kelly Blakeslee, a well-known child psychologist, says, “random payments will be frustrating and confusing, and will reduce the opportunity for learning.”
Tanni Haas, PhD, is a college communications professor.