As parents, our number one goal is to raise our kids to be kind, compassionate human beings who can function in the world as independent adults. In the early years, we’re often focused heavily on those “kind and compassionate” terms. Our goal then is to teach kids not to hit, bite, or pitch fits. You know, to generally control their emotions and think about other people.
But as kids age, it’s essential that we also start teaching them how to become independent. Unfortunately, all too many kids reach college and young adulthood without understanding some of the basics of said adulthood. This includes how to manage their money. In fact, surveys show that a majority of teenagers don’t think their parents have taught them much about how to manage their finances.
Luckily, it’s not that hard to turn this situation around. Parents should, of course, talk with their kids about managing money. They should cover topics like investing, saving, and paying for college. But parents can also use one old-school tool to give kids hands-on experience with managing money: the old-fashioned allowance.
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Allowance as a money-management tool
Some parents these days have pulled back from giving kids an allowance, even a small one. After all, we shower our kids with gifts for holidays and birthdays, pay for their wardrobes and technology, and meet their basic needs. Why do they need an allowance?
This attitude makes sense — if you see an allowance as just one more entitlement of childhood.
But the fact is that allowances can be a valuable teaching tool. The earlier you start teaching your kids how to manage money, the better off they’ll be in the long run. And since it’s illegal for your six-year-old to get a job, an allowance might be the best way to start her on the track to eventual financial independence.
The key, of course, is to help your kids manage their allowances, rather than letting them blow it on whatever the toy of the week might be. Here are some tips to help you do just that.
Have them use allowance for basics
One way to restrict how kids use allowance is to require that they cover some of their own basic needs using those funds. Older kids, for instance, can purchase their own school clothes and supplies based on a pre-set budget.
You need to be careful with this option, of course, to ensure that your kids are properly fed, clothed, and prepared for school. But giving kids a weekly allowance that is meant to cover their school lunches (or packed lunches, if they want to be more frugal) can be a wise idea.
Some parents even find that giving kids an allowance for grocery spending is helpful. Letting kids pay for their own breakfasts and lunches on a budget is an excellent way to help them understand why Pop-Tarts for breakfast every morning is both physically and financially unhealthy!
Use the three-jar method
Another option is to enforce good financial habits for kids with a three-jar method. Instead of a single piggy bank, give kids a jar for saving, spending, and giving. These are the three main “buckets” of our personal financial lives, after all. This way, kids can learn to save and give early on.
You may want to enforce a three-way split between these jars. Alternatively, have your kids put a certain percentage of their allowance into saving or giving jars. This is up to you to decide, and to tailor, as your kids age.
The goal here is to show that the spending jar can be used at any time for literally any whim. Kids will quickly learn, though, that dollar store tchotchkes aren’t as satisfying as saving up for toys that they’ll enjoy for the longer-term. It’s always okay to encourage kids to save a little longer for things they really want. But you should never outright prohibit them from spending money in the spending jar. They’ll learn from experience, as we all do.
Money in the savings jar can go a couple of ways. Some parents prefer to let kids use these funds to save for a specific, concrete goal, like a new video game. If this is your approach, be sure it will take your child a few months or a lot of hard work to save for this one thing.
Another savings jar approach is to make a monthly deposit of these funds into a savings account. Once there, kids can get some experience with saving in a banking environment, which can be fun. Plus, you can show them how their money grows over time because of compounding interest.
Related: Top Online Savings Accounts for Kids
The giving jar is similar to the spending jar, except that the spending has to be on someone other than the child. It’s usually best not to restrict kids’ impulses here, either. If they want to give a few bucks to a homeless person on the street, direct them towards buying that person some food if that makes you more comfortable. But don’t restrict “giving” to just donating to a charity. This can really put a damper on kids’ enthusiasm to altruistically meet the needs and wants of those around them.
The three-jar method has gained popularity recently because it works well. Even the youngest kids, who only get a few dollars a month in allowance, can see this division at work. And it can easily be tailored into a three bank-account method for older kids who are getting more substantial allowances, or who have jobs outside the home.
Consider commission-based chores
What if you’re uncomfortable giving your kids money to basically just exist? You’re certainly not alone! In fact, paying kids for doing nothing is one of the main arguments against allowances.
You can help kids understand and manage money without going down this route, though. Instead of a set allowance that your child earns no matter what, offer commission for certain chores.
In our house, it works like this: Our four-year-old has a short list of expected chores, including making her bed, putting away her clothes, and feeding the cat. She has to do those chores first. Then if she wants to, she can choose other paid chores, like folding towels, helping with the dishes, mopping the floor, or washing the stairs.
Sure, she’s not great at these other chores. But she is capable of doing them, for the most part. And she gets paid anywhere from 75 cents to $1.50 per chore, depending on how long it will take her. We chose these amounts specifically because the quarters can easily be split three ways into her spending, saving, and giving jars.
As she ages, her list of expected daily and weekly chores will increase appropriately. Her commission-based chores will get more complex and begin to take more time. We may eventually use a blend of allowances to cover some basic expenses and commission-based chores. This way, we can cover spend/save/give goals as well as wants.
Regardless of how you decide to pay your child, and how much you decide is appropriate, giving your kid money to handle from an early age is a great idea. It’s one sure way to boost their financial literacy in a hands-on environment.
Let us know in the comments if your child gets an allowance, or if you’ve tried the three-jar method. How did it work out for you?