Tips for Starting Your Child on an Allowance
We all want our children to have financially healthy futures. By teaching them how to earn and manage money in small amounts through an allowance when they’re young, you’ll help them grow into responsible and self-reliant adults.
The real price of allowance
Many parents give their children an allowance. Some parents give their children a few dollars a month, and some parents give their children $100 or more. The amount of money is really up to the decision and finances of the parents, but giving allowance without giving household chores or responsibilities can teach your children the wrong financial lessons.
Free allowance teaches children that money comes without hard work. This hardly prepares them for the realities of adulthood. Children who don’t learn responsible money management will likely be unable to manage their money effectively when they grow up and move out on their own. They’re at risk for racking up huge amounts of debt in early adulthood.
Upon entering adulthood or moving on to college, the lack of free money from parents can come as a shock. Your child may be ill prepared to earn and manage money for living expenses or fun. When you give your children a free allowance, you neglect to teach them that money must be earned.
Let’s not knock allowance completely, though. Giving your children some money to manage is a great idea, especially if it’s paid for work they must do around the house. Allowance is a terrific tool to help them learn how to budget and spend their money.
Also, when you give your children money, they’ll learn the sting of being broke and be more likely to keep savings in the future. Allowing your children to learn the financial skills of budgeting while they’re still young is a great idea. After all, learning the hard way is more disastrous for adults.
Here’s how to manage your child’s allowance to teach good financial skills: Make them earn allowance instead of receiving money freely. You’ll help your child develop a better work ethic and financial skills if they have to work for their allowance by doing household chores. Your children will also benefit from learning how to do useful things like clean bathrooms, mow the lawn, vacuum, take out the garbage and do laundry. You’ll also benefit by having to do fewer chores.
As a parent and distributor of allowance, you can also teach your children the meaning and true price of debt. This is an invaluable lesson you can instill in your child as debt can cause financial disasters in adulthood. In the case of debt, learning young will help your child avoid unnecessary debt as adults.
Here’s how you can help your child learn about debt: Let’s say your child really wants to buy a new toy, game or sports equipment. Why not give them an “advance” and cover the expense? Write down the “account” and explain to them that the money must be worked off. They must continue their chores, but instead of receiving their usual allowance payments, they must work until the account balance is zero. They won’t get any more cash until the balance is paid off.
Put a cap on how much you’re willing to “lend” your child. After all, real world lenders impose limits on people who take out loans without paying off previous debt. By mimicking real-world financial institutions, your child will be one step ahead of the game in understanding debt management and credit scores.
Good financial management skills start young
If your child is old enough to earn an allowance, you can already start teaching them responsible finances. As a parent, you have a unique position to guide your child to financial responsibility and a healthy adulthood.