Teaching Your Children About Money

Learning about money starts early which means it’s never too early for you to teach your children about money basics. When your children start making requests for things or money, that’s your clue. Your time will be well spent. Effective money management is an important life skill.

Before making decisions about whether to give your child money, stop and reflect on your personal attitudes about money. Ask yourself questions such as: What does money mean to me? Was I given an allowance? What were the rules that went with it? If I did not receive an allowance, how was money given to me? What memories do I have from my childhood about money? Can I remember my parents talking to me about money management as a child? What attitudes about money do I want my children to learn? Discuss your answers to these questions with your partner and other adults who are involved in your child’s financial education.

A good time to consider giving your child money is when he or she is between the ages of five and eight. Most parents use the Dole System or the Allowance System, and both have advantages and disadvantages. Research shows that in some instances an allowance may cost less than simply giving or doling money out for specific needs and wants.

Dole System Advantages

  • You can give or withhold money as you wish.
  • It allows for flexibility if the family income is irregular.
  • It is easier for you to control and monitor the types and amounts of purchases.

Dole System Disadvantages

  • Children may get the impression that the money supply is limitless.
  • Children do not learn budgeting or planning skills.
  • You may lose track of how much money has been given and it can lead to power struggles between you and your child.

Family attitudes, values and available resources may be factors when deciding whether to give an allowance. Giving an allowance requires more attention to details as the family establishes guidelines and commitment to the agreement by both the parent and child.

Allowance System Advantages

  • Teaches basic money management.
  • Promotes independence.
  • Encourages communication about finances, planning and goal setting.
  • Promotes a sense of responsibility.
  • Provides practice in living on a set income.

Allowance System Disadvantages

  • Can become a power issue if used as a reward or punishment.
  • Children may think money is the only reason to perform well, if linked to chores or grades.
  • You may not know how much money your children can successfully handle.

Two kinds of allowances are the earned income allowance and the entitled income. When allowances are established based on a child doing chores to earn money, it’s important to involve your child in establishing the guidelines and expectations for performance. Do not withhold the allowance as punishment for bad grades or behavior or as an incentive to improve grades and behavior. Both defeat the purpose of the allowance. Using the allowance as a form of discipline and control is not effective in teaching basic money management and responsibility.

The entitled income allowance suggests children share a portion of the family income just because they are a member of the family. It can positively reinforce the sense of togetherness and family, but should also carry implied and identified responsibilities to the household.

Regardless of the type of allowance, it is important to be consistent and to establish clear-cut rules for how the child is to use the money. It also is important that the allowance include enough money to allow the child to make decisions about saving and spending. Depending on the child’s age, you may want to include the principles of earning, saving, spending and credit as you teach your child about money.

Now is the time to begin teaching your children the vital life skill of money management. Review how you presently give money and communicate with your child about money. Make adjustments as necessary that will ensure your child learns sound money management skills for life.

 

Parents’ Guidelines
for Allowances
  • Be consistent. Set a particular day of the week or month to give the allowance. Agree on the amount and the limits for spending and saving. Consider using an allowance contract that both the parents and child sign.
  • Children need to be able to spend some money as they wish, without supervision or comment from the parent. They need to practice making their own decisions and living with the consequences.
  • Do not rescue the child every time he runs out of money.
  • Reinforce positive behavior by means other than giving money. Other rewards and expressions of appreciation will send a better message than a financial bonus.
  • Encourage and praise good money management. Avoid criticizing and punishing for mistakes. Help your children develop confidence in their own ability to manage their finances.
  • One plan does not fit all. Consider each child’s individuality, needs and responsibilities and respect his rate of development.