I'm always astonished when I hear a parent proclaim, "I don't believe in giving my child an allowance." Sometimes this is accompanied by, "I'd rather just hand him cash when he asks" and /or "I don't want to spoil him." Either way, I'm puzzled by this attitude.
Our job as parents is to raise our children to be functioning adults some day and adults need to know how to handle money.
Children of all ages are experiential learners: they don't learn well if they're lectured about something – instead, they need to experience things themselves. This includes making mistakes and learning from those mistakes. Where money is concerned, it means that they must be given small amounts of money at young ages so that they can learn about it in a risk-free way. As they grow, and we give them more allowance -- along with more responsibility and expectations about how to spend that money -- they will already have some basic financial literacy.
For the next 8 weeks, I’ll be talking about how to create a financially literate adult. While I’ll primarily be addressing the issue of teens and financial responsibility, I’ll also be talking about money and younger children too, so don’t stop reading if your child falls into the “younger” category. In fact, in the elementary school and pre-teen years there are many things you can do so that when your child becomes an adolescent he or she makes fewer financial mistakes.
My teenage son, Dan, has agreed to be part of this project and has given me permission to write about how we manage allowance and teach fiscal matters in our own home. In addition I’ve teamed up with American Express – specifically using their new PASS card for teens – to take the next step in launching my own teenager into his senior year of high school and, ultimately, making him more financially savvy in young adulthood and beyond.
So, to begin, I want to answer the question of “What is allowance?”
First of all, I don’t believe in giving allowance as a reward for good grades or as payment for chores and I’m often asked about this. Here is my answer: if your child is paid to do something and doesn’t accomplish whatever it is you’re asking (grades or chores), then they’re not going to be given the money they need in order to learn to be financially responsible. This is my definition of Allowance: “Allowance is money that you would spend on your child anyway, but instead of you managing that money, you give it to her to manage.”
When children are young (and I believe you should begin giving an allowance at around age six) the amount should be small and fairly insignificant: enough to buy that trinket they keep nagging you about but not enough to buy one every day or even every week. In this way, you can begin to teach them to save money. When they nag you, you can say, “That’s something you can spend your allowance on.” You can help them count how much they’ve already saved and calculate how much more they need and how long it will take them to save it. This not only teaches math skills but also helps them learn to delay gratification.
My own son, Daniel, received an allowance beginning at age six. Between ages 7 and 8, he learned how to figure out whether or not he had enough money for an item “tax included.” By having an allowance during the elementary school years, he internalized many lessons that he wouldn’t have to re-learn in adolescence: how to save for a specific item, how to calculate tax, how to avoid impulse purchases and, perhaps most importantly, he learned about “buyer’s remorse.” Buyer’s remorse is what happens when you purchase something impulsively that isn’t a wise choice and discover how it can make you feel pretty crummy afterward. Because these lessons were learned on a dollar or two a week, he didn’t have to relearn them later, when bigger ticket items were at stake.
Now that he’s entering his final year of high school, we want to move him from a weekly allowance to a monthly one. One of our goals is for him to figure out how to manage his money over a longer period of time in order to model what happens in the adult world. In other words, most people receive a paycheck either biweekly or monthly and have to figure out how to budget it over a two- to four-week period. Another goal is for him to figure out for himself how much cash he needs to have on hand for items that can’t be purchased with “plastic”: the occasional slice of pizza or pack of gum for example. He also needs to determine how much cash to withdraw from an ATM in order to make it “worth it” to incur the ATM fee. Instead of handing him money for a Metrocard each week, we want him to purchase one for himself that will last the entire month. (Outside of New York City, the equivalent would be that we would want him how to figure out how to budget and pay for gasoline.)
As you begin to think about raising a financially literate child or teen, review the information above. In my next post, I’ll discuss how to determine the dollar amount you give to your child. I’ll also give you important communication skills to discuss spending, saving and charitable giving with your child.
(For more information about the American Express PASS card for teens, go to americanexpress.com/pass)
Please note that Julie Ross is being compensated by American Express for these blog posts and the ideas expressed are entirely her own.