Friday, March 25, 2011


Many parents debate the reason for an allowance.  I often hear them using the concept of  'no chores, no pay' as one of the rules for receiving money. I disagree with this method. Your child isn't employed by you and allowance is not their paycheck. It is a tool for financial education. Let's say you remind little Johnny that unless he takes out the trash, there will be no allowance. He could very well say he didn't want the money so he isn't taking out the trash. Now what?  You can't fire him. You are aiming for financial education, not compliance.They are separate lessons. Little Johnny hasn't learned much about money, has he?  Here is the method that is working pretty well for our family.

When our oldest son was five, we decided it was time to start the financial lessons. Chores were not tied into the plan. You have chores because you live here and you do them because that is just what you do. His chores were simple enough to not merit pay. (We make our bed because it looks neat. We feed the dog because she is hungry.) Allowance could be used as he chose with little imput from the parents. A large part of financial education comes from making mistakes and it's better to do that when you are five rather than 25. The first step was all about management.  Savings, giving and investing would come later. Also, the money had to be an amount that would be manageable for a five year old. At the time his favorite past time was Star Wars. He loved the little characters and so the amount of his allowance was enough to cover the purchase of one, which was about $5. I wasn't concerned about tax; that lesson would follow. We didn't want the allowance too low because our first lesson wasn't about learning how to save.

He was very excited about this new adventure.  We would head off every Friday to the local giant discount store for him to spend his allowance. He would carefully make his selection and was very pleased with himself. This went on for several weeks until he decided he would rather have gum. I carefully suggested that might not be a good idea because gum didn't last very long and perhaps a toy or book would be a better choice. He thought for all of half a second and decided gum was the thing to have. I said no more. On the way home, he ripped into that packet and began chewing. Within an hour it was all gone and I still said nothing. It took a few hours but the lesson sunk in. 'Mama, the gum didn't last very long. I wish I had a toy. Can I have more money?' I refrained from the I Told You So's and replied, 'I guess you're right, gum doesn't last very long. You can get more money next Friday when it's Allowance Day again.'  Over time, he has made quite a few mistakes. He realizes what he could have done differently and learns from the mistake. 
We hit upon a winning plan. On that same $5 allowance, combined with a minimal amount of birthday and Christmas money, saved up more than half the price of a very expensive gaming system. Now, at age 12, he donates to charities that touch his heart. We have a Giving Jar in our kitchen where we put some stray $1 bills and change.  He contributes regularly to that jar without being prompted. We've used the money to purchase a meal for an overwhelmed neighbor, we've given it to the Christmas Bell Ringers, and a host of other places.

It is imperative to begin financial lessons when children are young. They are so receptive to the idea and the younger they are, the more simple and fun the lessons can be.

It isn't all that complicated to get started. Decide on a dollar amount and pick a day to serve as Allowance Day. The most important thing you can do is to let your little one decide how to spend the money. Otherwise, it's just you making their decisions for them, which would completely defeat the purpose.

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