Book One in the Dollars and Sense Books series by Paul W. Lermitte
When your child reaches the age of five or six, it is time to introduce her to the world of money. By this age, she will be familiar with money on several levels—she can count it, identify the different denominations, and recognize that she needs a specific amount to buy the goods she wants. Thus, it is a natural time to start giving your child an allowance, to establish an “allowance system.”
Some children may be ready at a younger age, especially if they are avid counters or shoppers. But I would urge you not to rush your children. Preschoolers can be given change to put in their piggy bank or to purchase a candy bar, but an allowance is not necessary.
Establishing an allowance system may sound like a simple matter, but it may not always be straightforward. Here are some questions you might ask yourself:
- Should I give my child an allowance at all?
- If so, how much money should I give?
- When should I give it?
- What should the allowance be used for?
- If I give my child an allowance, who pays for special treats?
- Should my child earn the allowance by doing chores around the house?
- Should the allowance be tied to achievement at school or used to encourage good behavior?
- Should part of the money be put in the bank as savings?
- Should I transfer funds automatically from my account to my child’s?”
In most cases, parents answer their questions about allowance by drawing on their own experiences. They say: “When I was her age, I got 25 cents a week for allowance, and it was plenty.” Or they say: “I didn’t get any allowance. I had to earn money by doing chores around the house.” Parents also consider examples set by relatives, friends, and neighbors. They say: “His cousin gets an allowance of $20 a month, so that’s what we’ll do.” Or they say: “Suzie across the street only gets an allowance if she makes her bed every day.”
Unfortunately, taking your lead from the past, or from people around you, is a risky strategy. What worked twenty-five years ago may not work today. The world, and kids, have changed dramatically since you were growing up. Today we are bombarded with more advertising and much more product choice. Many of us lead busier, more stressful lives than our parents did. In the same way, what appears to work across the street might be the wrong approach in your house. Every family has different values, customs, income levels, and attitudes toward money.
“Chores begin when your child can pick it up, put it away, fold it, sort it, or carry it out the door.”
—Jean Ross Peterson, author on financial issues
So what can you do when faced with all these divergent examples? The solution is quite simple, really. Create your approach based on certain principles that have been proven to work over and over again, by my own family and by the families of many of my clients and friends. I call these “The Key Allowance Guidelines.” In setting them out and providing the Allowance Contract, I aim to help you
- introduce your children to the value of money
- teach them the basics of good money management
- establish in your children a lifelong habit of saving
The Key Allowance Guidelines
In this chapter I’d like to state these guidelines twice because they really set the foundation for much of the financial advice to come. The five key allowance guidelines are as follows:
- Make a promise to your child
- Have your child make a promise to you
- Be consistent and firm
- Do not tie allowance to chores or achievement
- Make savings part of the allowance contract
Let’s look at each of these guidelines in more detail.
1. Make a promise to your child
You may choose to give the first allowance as a significant rite of passage. You could tell your children: “When you turn five [or six … or whatever age you decide], you will start getting an allowance.” This approach is helpful in families with several children because young children have something to look forward to. Explain to your children that an allowance is a set amount of money, given weekly, to enable them to pay for things that are important to them, such as toys, candy, video games, or books.
Before you start your allowance system, promise your child a specific amount of money on a specific day of every week. Give an amount you deem appropriate. My guideline is one dollar times half their age, per week. (I discuss this suggestion in greater detail later in the chapter.) Establish a day of the week, such as Sunday or Monday, that makes sense for your family situation. Of course, the point of making the promise is that you keep it.
2. Have your child make a promise to you
Before she receives the allowance, suggest that your child promise you two things. One, she will set aside part of the allowance for savings. Two, the rest of her money will be “mad money”—used for fun—and she will not ask you for more when it is all gone. If she does not have enough money to buy everything she wants, she can do extra odd jobs around the house for payment or find small jobs to do around the neighborhood.
3. Be consistent and firm
Once you start giving your child an allowance, try to be consistent, and give the amount of money you promised, on the day you promised. Remember, your child looks forward to that allowance the same way you anticipate your paycheck. If your child spends his allowance right away, do not top it up! Tell your child he will have to wait until the next allowance day. You may hear some whining and even slamming of doors once in a while, but this will not go on year after year. If you hold firm, your child will know the buck stops there. If your child thinks you will always give more money if his runs out, he will never learn to manage the allowance.
4. Do not tie allowance to chores or achievement
A child should receive an allowance for being part of a family. The majority of financial psychologists and counselors agree that an allowance should not be tied to personal achievements, such as getting an A on a report card or winning a softball championship. (See chapter 2 for more discussion of this issue.) Encourage hard work and good behavior, and reward achievement in other meaningful ways. In other words, do not use an allowance as a bribe or a reward. Give an allowance to teach your children the basics of good money management.
5. Make savings part of the allowance contract
Saving money is a habit that should be learned at an early age. The best time to begin teaching this habit is the first time you give your child an allowance. I suggest you require your child to save 25 percent of his allowance each week and put the savings in the bank, or a piggy bank, every month. Help him set a goal for something he would like to buy with the savings. Ask him to agree to keep the savings for the first three months, to build patience and a larger savings amount.
In my experience as both a parent and a professional financial planner advising families in business, these five allowance guidelines are very important. When our children were growing up, each had their own money to spend on treats. They purchased toys and books with their own savings, accumulated spending money for family holidays, gave money to charity, and put long-term savings into mutual funds. We used these same allowance guidelines to teach our children good money-management skills. If you incorporate these guidelines into your routines, your children will learn valuable lessons about money and develop skills and habits that will last a lifetime.
But wait! There’s more! To get the whole book so you can read the rest, please check your library or visit our Order Page.
The rest of Chapter One addresses:
- Setting Up and Allowance System
- The Allowance Contract
- The Allowance Tracker
- Step-by-Step Summary of Paul’s Key Points
And you can see what the whole book covers by viewing our Table of Contents.
For a set of free, downloadable worksheets you can keep and use with your own family, including an Allowance Contract to help you get started, visit our Worksheets Download Page.
©Paul W. Lermitte