Unless your children go to a highly unusual charter school, you can’t expect them to graduate with much in the way of financial education. The best you can hope for is a “Personal Finance” class consisting of 9 weeks learning how to read a paycheck and figure out taxes.
That leaves the burden of childrens’ financial literacy firmly in the laps of the parents. Banks, books, podcasts and web classes all offer a variety of tools to help you with this responsibility, but one of the best has been with us for centuries: allowance.
To use this tool effectively, you can’t just shell out some bills at regular intervals. Teaching with allowance starts by making some basic decisions about how and why allowance appears.
One of your first decisions needs to be how allowance happens in your home: why your children receive money in the first place. There are a wealth of approaches here, all equally valid:
Allowance is a given, part of being a member of the family.
Allowance is earned by completing a basic list of chores or responsibilities.
Allowance is earned by high performance on key tasks (such as grades), and can be lost with poor performance.
Allowance is a special occurrence, earned only by unusual circumstances.
Allowance is a responsibility, requiring management and planning.
Which you choose will depend on your goals for an allowance. Is it a gift to your children, a way of securing compliance with household chores, or a teaching tool? Again, all are valid — you just need to be clear about your goals to make the best decision.
How you present allowance is as important as why it happens. You can simply hand over money on specific dates or days, or you can use allowance day as a chance to teach basic money concepts.
The “three bucket” system teaches basic budgeting by dividing allowance into three pieces: one for spending, one for saving, and one for gifting — either to a charity, or as part of the yearly run of holidays and birthdays.
Other families “tax” allowance by drawing savings contributions out of the allowance before handing over a child’s “take home pay.” Going through the “pay stub” each time prepares kids for handling their own pay checks as they get older.
What happens if your child wants an expensive item, or a small item after she has spent all of her allowance? Do you…
Make her wait until payday?
Loan her money against the next allowance?
Loan her money and charge interest?
Offer opportunities to earn more money via chores or other tasks?
As with why allowance happens, the best answer will depend on your goals for allowance.
Allowance, like any financial topic, is complex and personal. There’s no single right answer we should all follow. Whatever answers work best for your family, you’ll find them by always keeping in mind your reasons for paying allowance. With those in mind, you’ll make the best smaller decisions for accomplishing those goals.