Giving your child an allowance can lead to a brighter long-term financial future. According to a study by T. Rowe Price, kids who receive an allowance are better with money than those who don’t.
Today, 70 percent of kids get some kind of allowance. With this many potential rookie spenders, it’s important to think about the best way to empower children with financial knowledge and freedom.
Here are some tips to consider when doling out an allowance to your kids.
1. Start ’em young
According to BabyCenter, kids usually start receiving allowances between the ages of 5 and 6. KristanLeatherman, coauthor of “Millionaire Babies or Bankrupt Brats? Love and Logic Solutions to Teaching Kids about Money” says, “The best time is when your child begins to understand that money can buy him things he wants.”
As for how much to give? Experts suggest half of the child’s age per week. So a 6-year-old would get $3 per week.
2. Don’t tie it to everyday chores
Children need to realize that basic household duties should be done without compensation. Pitching in is just part of being a family member.
3. Teach budgeting
Giving an allowance is a great way to start teaching your kids about budgeting. When they want it all but have limited funds they will quickly learn that they have to prioritize.
4. Give. Spend. Save.
While they are learning to spend money, it’s also a great time to talk to your kids about saving and giving, too. Depending on their age, you might consider setting up a savings account with them. Start talking to your kids about charitable giving and ways they might be able to help others. If your kids are very young, setting up one jar for saving, one for spending and one for sharing can be a good way to teach this concept. Even Elmo’s talked about this three-jar method—watch below.
5. Talk about it
While the idea that money isn’t a topic that should be discussed persists today, the T. Rowe Price research shows that not only is talking to your kids about money important, talking about it with your partner in front of your kids is, too. Kids whose parents talk about finances in front of them were more likely to report the following (compared to kids whose parents didn’t discuss financial topics in front of them):
- Say they are knowledgeable about managing personal finances (39% vs. 16%).
- Think their parents are doing a good job teaching them about finances (58% vs. 32%).
- Think they will go to college (86% vs. 72%).
- Feel they are smart about money (45% vs. 24%).
6. Let them make mistakes
Part of learning to manage money is making mistakes. If your child is saving for a new video game but falls short because he made an impromptu ice cream purchase along the way, fight the urge to make up the difference for him. Helping your children understand that their financial decisions have repercussions will help set them up to make wise money decisions later in life.