How To Raise Great Money Managers Using An Allowance System

Passing on sound money lessons to our kids is vital for their future. Kids who understand how money works are less likely to make big-impact mistakes in the future. Financially smart kids also help parents maintain a sustainable, stress-free money management plan at home. Those kids aren’t always asking Mom and Dad for things they don’t need! But how can we teach them what they need to know?

A structured and consistent allowance system is one of the best ways to teach kids about money, empower their entrepreneurial spirits and reduce the constant “gimmes” for parents. To get your family started on the right foot, here are five of the best allowance tips to raise great money managers.

Start As Early As Possible

A common question many parents have when around allowance is when to start. You don’t want to risk starting too late and missing their most formative years, but you also don’t want overwhelm your child. The key is to make money conversations age-appropriate and to keep allowance amounts small enough at early ages to be easily understood and valued by your child.

Most kids are ready to handle money a lot earlier than parents think. Research from the University of Wisconsin-Madison has shown that most kids understand the basic concepts of value and exchange, the central idea of money, by age three. Also, many money habits are set by age seven!

Start with small amounts at the toddler ages, then work your way up as they gain understanding. Even if they’re only collecting enough to buy a little bag of animal crackers in the grocery line checkout, they’re developing critical lifelong habits.

Give Their Allowance A Job

Allowance offers no benefit to financial literacy education if handed over with no strings attached. An allowance system gives kids the opportunity to practice real-world money management. Everyday things cost money. And your allowance system should teach that.

Choose a small expense in your home (or greater if you have older children) that is often used by your kids. Think the Netflix account, internet connection or even swim lessons. Then set an amount your child will pay monthly for that expense.

Be sure their allowance is enough to cover the cost, with some wiggle room for their own spending, if well managed over the month. Let your kids practice setting aside money for their bill when they receive their allowance each week. Finally, expect them to pay at the same time each month. If they can’t afford the cost, don’t be afraid to institute late fees or remove access to the service, just like real life!

Support Their Ideas To Earn More

There are great debates in the allowance world around whether an allowance system is best connected with regular chores. Some people believe allowance should only be a tool for teaching money management, while duties are an expected part of being a household member. Others think allowance needs to be tied to work performed. Either way your family chooses to go, you should undoubtedly also support out-of-the-box thinking!

Ron Lieber, the author of The Opposite of Spoiled, recommends asking your kids what they think needs to be done around the house and negotiating a fair rate. Alternatively, if your child comes to you with a business idea, you could help them plan start-up costs and set pricing. Some parents offer to put in some of the start-up funds with the understanding they’ll be paid back with the first profits.

Kids are naturally more creative than adults. Their interest in money and desire for new toys and gadgets may push them to find more ways to earn once you’ve given them a taste. Encourage their entrepreneurial spirits by engaging them when they ask for more money.

Let Them Experience The Consequences Of Mismanagement

Remember how allowance is about giving our kids a taste of the real world? That means occasionally falling on their faces financially. The experience may be painful to watch, but better now than later. As we all know, adult mistakes are much harder to come back from.

Make sure you give your kids the chance to buy that toy you know they will regret. Or make them pay a late fee when they forget to save for their monthly bill. And if your older kids run out of gas money, don’t be afraid to make them find rides with friends until they can save up again.

Just remember that the dust will settle, and failure is the best learning opportunity. Take a moment to talk to your kids about what they could do differently next time. Chances are they won’t want to feel that disappointment or strain again.

Encourage Saving With “Bank Of Mom & Dad”

Wouldn’t it be great if your child naturally saved a percentage of every allowance for their future expenses? Or put even more away when they don’t need something today? Unfortunately, kids have a hard time valuing future benefit over current consumption.

Delayed gratification is one of the building blocks of financial success. The famous “marshmallow study” by a Stanford professor in the 1960s showed that a child’s ability to delay gratification was the best indicator of future achievement in school, career and money.

Parents can encourage saving by offering a “Bank of Mom and Dad” interest rate that makes putting money away more attractive. You could also provide a match for savings goals your child has. While they’re unlikely to see a 10% interest rate at the local bank, the principle is the same. And learning these lessons now prepares them for saving and investing in the future!

Help Your Kids Build Strong Money Habits With A Regular Allowance

Practice makes perfect. In money, as in everything else. Start your kids off on the right foot by letting them jump into their education early. When children are taught how money works, they’re more likely to stay debt-free and make smart decisions as adults. Isn’t that what we all want for our kids?