Giving Your Child an Allowance

A child’s allowance can be more than just a convenient way to buy snacks – it can be a teaching tool for a lifetime of sound financial management. Parents can help children learn how to use the money that is given through a weekly or monthly allowance, giving them age-appropriate opportunities to learn about spending, saving, budgeting and more.

Following are some key principles of financial literacy that you can teach your kids through their allowance:

Needs First, Then Wants
The concept of “budget” can be taught through the management of an allowance. Give your young child a weekly allowance that he or she can spend on snacks as he or she sees fit. If the child spends all the money on the first day of the week, there will be no more money for snacks that week – unless YOU give more, which, of course, you won’t! It is important that a child experiences a “pay day” just like grownups do. Money is given at regular intervals – every week or every two weeks or every month or even every six months for older teens. The child needs to learn how to make dollars stretch over time, just like you do.

When kids are just a little older, they can begin to practice discretionary spending – making decisions about how to use their funds. Parents can help with this process by giving an allowance that must cover more than snacks; it can cover entertainment, school snacks, restaurant meals, make-up and other toiletries. The younger the child, the fewer the items covered by an allowance. Young teens can use their allowance to buy school supplies and some of their clothing as well as leisure items. With one larger lump sum, kids will begin to look for bargains and sales on necessities so that they can have more entertainment and treat money available. Older teens and young adults may receive their allowance as a monthly stipend deposited directly to their bank account or given as an advance on a credit card. This allows them to learn about money tools, credit, simple savings and chequing accounts and other aspects of adult money management. For each age group, parents can teach the importance of allocating money for necessities, savings, pleasures and charity.

If possible, bring home some “allowance” books from your local library. There are lots of books that teach kids how to use their allowance for everything from spending to helping their money to grow.

Pay Yourself First
You can use your child’s allowance to teach the concept of saving for larger expenses. For instance, you can encourage your child to set aside a portion of the allowance each “pay day” and then use those savings for a special purchase (a special toy, article of clothing, activity, class or whatever). Older kids can be encouraged to deposit these savings into a bank account while little ones can be given a piggy bank that will serve a similar purpose. Kids can really enjoy the accomplishment of being able to buy themselves something that they’ve worked hard to save for!

Money can Make More Money
You can also use the allowance to teach your child how to make money! At an early age, explain to your child the basics of entrepreneurship and/or investing. Luckily today, there are many board games for kids that aim to teach how to manage capital, expenditures and income. A portion of each allowance payment can be set aside for one or both of these purposes. You can also encourage your child to start a business –  it doesn’t have to be big; a lemonade stand in front of your house will do. Offer plenty of encourage and even invest in your child’s business – children enjoy making money as much as adults do.

Of course, you can’t expect your child to spend, save, invest and start a business on a salary of 25 cents! The more you want your child to learn about the different aspects of finance, the more money you will have to offer for learning purposes. Work within YOUR budget in order to help your child learn young. It’s much better for your child to make mistakes using small amounts of money that have no real consequence than to learn later on when his or her family may suffer the consequences!

Teach Your Child to Share His Wealth!
While saving conscientiously and earning through a business gives a child the right to spend money on personal wants and luxuries, kids are never too young to learn to give to charity. You can ask your child for the kind of cause he or she is interested in supporting, and you can both learn what you can about the various venues for financial participation. Giving to others is gratifying to people of all ages – give your child the opportunity to feel the great pleasure of helping others. Even a small allowance can be divided so that 10% goes into a little charity box. After awhile, those pennies, dimes or dollars will add  up to a significant sum worthy of donation to a proper cause.

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