Dr. Allowance: Raising Financially Informed Children

According to a study by Sallie Mae, college seniors with at least one credit card graduated with an average of $4,138 in credit card debt in 2008. Graduation has been characterized by many as the introduction into the “real world”. Today however, it seems the “real world” is sneaking-up on college students from behind, crawling in their pockets, and getting a bit too comfortable. By this point, it’s a bit too late to sit down 22-year-old Petey or Jasmine and give them a good ole’ fashioned lesson on how to manage money.

You’re about eighteen years too late, or so says Scholastic, the book publishing company that influences much of what students learn and teachers teach today in America. According to them, financial education should begin around five or six-years-old. “Intense” you say? We think not.

The most easily implementable form of financial education for kids is an allowance. Now before you go making charts and reward-systems worthy of Nobel nomination, we’ve got a few pointers for you:

Above and Beyond. An allowance should be given for something done above and beyond the normal responsibility of the child. For example, all children have responsibilities like fixing the bed, doing their homework, brushing their teeth, and picking-up their toys. These should not be financially rewarded responsibilities. An allowance should be assigned to something extra, something beyond the minimum. The reason being, an allowance shouldn’t be withheld even if the child fails to do his required chores. In this sense, the allowance is being used as a disciplinary tool.

Stick To It. Now that you’ve assigned the chore, a schedule is absolutely required to help children stay focused and see the benefit of consistency. You don’t necessarily have to draft a fancy schedule and post it on the wall, but it should be understood by all family members perfectly. For an example: all chores must be done on Saturday morning, before any other extracurricular activities (video games, friend’s houses, parties, playing, etc.). While the goal is to teach the child initiative, at the end of the day the kid is only six years-old. Directions are required.

Make a Match. Not all children are the same, so don’t treat them like they are. Sit down with your kid, explain that your trying to teach them how to earn and manage money. Let them choose the chore(s) they would like to be responsible for. While this may only work for younger children, try to match your child with a chore he/she may mildly enjoy (or hate the least!). This will save you from future headaches and your ears from falling-off due to complaints.

Show ‘em the Money. A clear weekly allowance must be established. First consider your financial situation and what can be afforded. One easy method is to reward the child $1 for every year of age. In other words, a 10-year-old will receive $10 a week. This can obviously be adjusted based on your family and what is financially feasible. Regardless of the amount, be sure to sit-down with lil’ Johnny and make sure he understand’s his new responsibilities and what he’ll be receiving as a reward.

Gooooaaaallllsss. Now let’s finish strong, help your little guy set a goal or two. After all, the purpose of an allowance is to begin teaching your child how to manage money, not to put you in the poorhouse. This step is where your finally given the chance to expand the child’s understanding of how money should be spent. The exact goal isn’t as important as just having something your working towards. As opposed to having one simple goal, perhaps you can save for two, completely different things at the same time. For example, you could have a “Spend”, “Save”, “Donate” and “Invest” category. Heck, there’s even a piggy bank (pictured above) for that. Or if your child is more of the cyber-type, check out Three Jars, an online savings tool for children. Regardless of the categories, the very act of choosing how to allocate the allowance will stretch the child’s understanding of money and how it’s used. This is where the learning kicks-in.

With these basic steps, you should be able to implement an allowance system in which your child learns the value of a dollar and the skills needed to spend it wisely. It’s (almost) never too early to start and as we all know, a child’s mind is much more moldable than that of an adult’s. If proper money management principles can be installed into a youngsters mind at a young age, they will no doubt grow-up to be financially responsible adults.