Why “how” You Are Paid Matters.

Having early exposure to the workforce is essential to understanding different career paths. The other benefit first jobs provide is a feel for various payment methods.

Why is it essential to have an understanding of different payment methods? We can sometimes get myopic in our thinking. We work and earn money, and it is easy to forget about all the other ways people work to earn their living. To earn a living, we need to add value by offering your skills+effort+time to make money from working. What is less obvious is that there are many ways to combine and emphasize each element.

What is the Difference?

Is there a difference between how a psychiatrist or a telemarketer earns a living? More specifically, how do the two professions gain access to money? What about a would-be actor versus a software developer. At first glance, you may think the struggling actor and telemarketer are more alike. Same with the developer and layers. But are they? Who has more in common with who?

While the amounts of money that the different professions could earn may differ a lot, the way they make money is very much the same.
Let’s take the psychiatrists and telemarketers. These professions track time spent working as part of their trade for money. If the telemarketer puts in overtime, they get a bigger paycheck. That is the same for a psychiatrist who may charge a client by the hour. If the psychiatrist takes on more clients and puts in more hours, they can get more money. Yes, their hourly rates are vastly different, but they both need to work more hours to get more pay. Depending on their skills and the going hourly rate, they both have an upper limit on their income based on the number of hours they can work in a given day.

Now let’s look at the other two professions; the actor and a developer who owns what they produce. They both work on a project basis. They may get paid to work on the project. It is also possible that they don’t get paid to complete the project. They both get paid based on how well the project is received. The more value the project offers, the more money they can potentially make. They take on more risk upfront but can earn money if the project is successful.

Paradigm Shifting

Consider how technology disrupters use their innovations to change the payment paradigm. Rather than renting movies a la cart, Netflix gave us a subscription. Rather than seeking roommates or long-term tenants, we can rent rooms Air B&B style. Exposing our children to work can help to change how they think about being paid.

When opportunities arise for first jobs or when we talk to our children about working, don’t forget to break down how we get paid. For example, when your kids are negotiating their first jobs, ask them if they will be asking for a lump sum payment once the driveway is shovelled, or are they going to ask for an hourly rate. Should they be paid per walk of the dog, or is it a weekly subscription? Is that babysitting rate by the hour, and does that rate go up based on the number of kids?

That early exposure to the workforce and payment methods will open up your child’s mind to the opportunities that lie ahead of them. You can encourage that by sharing your work experiences with them, helping them see all the different ways they can combine skills+effort+time with earning a living.

Teaching Financial Literacy – The One Thing You Need To Know

I hear you out there. “Teaching financial literacy is a drag.” And it can be. Like most, you probably think about being in a math classroom with a teacher droning on. Or maybe when you hear the word “teaching,” you have flashbacks of notebooks, textbooks, and tests.

While all of those can be part of the learning process, they are far from the only ways we can teach. I would argue they are not all that effective when teaching financial literacy. Especially not for your children.

There are many ways to teach, but the method I want you to focus on is storytelling. If you have spent any time reading my articles, you have seen some of my stories. From outsourcing my paper route to plunging myself into credit debt, I have endless stories to share about managing and mismanaging my finances. I tell my stories to show you where I went wrong and how I got back on the right track. I hope it is easy for you to see yourself in my stories of using credit cards to finance nights out. Or stories about not sticking to a budget when I knew I had no more money coming in and endless bills that don’t ever stop.

Share Your Stories

While I hope my stories resonate with you, what I want you to do is to find and tell your stories to your kids. Your stories will resonate with them. We all have our stories of finical triumphs and pitfalls. Not one of us has done everything right or wrong.

Kids love stories of triumphs. They love to hear how David slew Goliath or when Jack chopped down the bean stock. But to give them the tales of winning, we need to share the parts about our falls and missteps. We often learn the most from the mistakes we make along the way.

So share those stories, and don’t sugar coat them. Give them all the details about overdrafts, debt collectors, or repossessions. Please give them the tales about being laid off, downsized, or deemed “surplus.” We all get knocked down. But we are all still standing. Why? Because we all got back up. Show your kids how you are a fighter and what you have learned from your journey.

Tell them that you contribute to a retirement fund because you don’t have a pension. Let our kids know that you maintain a rainy day fund because you have lost jobs before. Let them know that you won’t buy them that toy because it is not in your budget, and your budget is what makes sure that the bills are paid at the end of the month and keeps you out of debt.

Those stories will resonate with your kids in ways that textbooks never could.

How Can Children Handle Money In A Digital World?

I received a great question from a parent yesterday about something that has been extra challenging since the start of the pandemic. How do we teach our children about money when so many of our transactions are online? This parent brought up the excellent point that during the covid pandemic, many of us shifted to online purchases. But even before, and definitely after the pandemic, more and more of our buying is going to be online. With so many of our financial transitions being digital, how do we give our children a chance to experience handling money?

If you have read my post on allowances, you will know that I’m a big proponent for avoiding digital options until your child has a firm grasp of saving and spending using cash.Child on phone So when the pandemic hit, I decided it was an opportunity to test out some of the digital options available to me.
We tried using Rooster Money for my nine-year-old son, who has demonstrated an excellent grasp of money management. I did not and would not make this transition with my seven-year-old daughter since she is still getting a handle on saving, but my son has had three years of practice and is doing well.

I won’t lie; the convince of using apps to manage an is hard to argue. It automatically credits my son’s account with his allowance every week. It allows him to move money from his accounts as quickly as an online banking account.

The drawback to going digital

But, even with all those convinces, it does raise a few problems.

  1.  I require that my son have access to a device. This is not too challenging for me, but it may be for some parents., and add to that, I have been battling with the increased screen time due to online learning, so adding another reason for him to be on a device isn’t my favourite.
  2. We have fewer discussions about money. My son can use the app to shift money from his different accounts (spend, save, give), but since it is happening virtually, we have fewer interactions and less dialogue about what he plans to do with his money. This challenge would be a show-stopper for me if my son’s interest in money and money matters were not as deep as they are. So instead, we find other opportunities to have these discussions. But if he was less interested, I think I would switch back to cash for this reason alone.
  3. When we manage his money via an app and make online purchases, it can feel like I am buying things for him since he does not have his online accounts or credit cards to make purchases. So instead of buying what he wants, he has to use my accounts and credit card and pay me back. This experience is a far cry from when he would go to the store and buy his one stuff. To help overcome this last hurdle, companies are releasing debit cards for kids, and I will dive more into those options in a future article.
So, what is the solution?

I still firmly believe that for younger children getting their first opportunities to interact with money, they should do it at a physical store. There is more to money management than moving money from one account to another. Interacting with service people as they cash you out. The anticipation of a purchase. The feeling of the exchange when you hand over your money to receive your item or service, to name a few.

The sooner we can give our little ones those opportunities to practice those skills, the better. I acknowledge that as we move more to digital, our children, as they grow up, will likely do most of their transactions online, but that doesn’t mean all of their transactions will be online. There is a reason why online stores call it a shopping cart. And have a check-out button. They are a proxy for the real thing. So, let’s give our children a chance to experience the real thing before they move to the virtual.

How does that work in practice?

I know it is not feasible for most people to take their child to a store all the time, but that doesn’t mean you can’t do it once in a while. A solution that worked for my kids was taking them to a physical brick-and-mortar store once a month. That cadence worked for us. They usually needed a few weeks to save up enough money to buy something, and I usually could find time in my schedule to take them to a store once a month. But that may be different for you. I also make sure to switch them back to cash and let them take complete control of the interaction once we are in the store.

In the end, what I hope you will do I find what works best for you. If monthly doesn’t work, maybe you shoot for every two months. The important thing is that you try to give them the opportunities to manage their own money, in whatever form works best for you and your family.

 

How I Paid My Nephew’s Tuition

Years ago, after watching my nieces and nephew on Christmas day get so much stuff that they couldn’t even figure out who gave them what, I started thinking. These kids are lucky. They get so much. But did they need all of this stuff?” No. So what could I give them that would be meaningful.
I told my wife I wanted to stop buying gifts for the kids. For my four nephews and three nieces. Not one more gift not for Christmas, not for birthdays, nothing, not one more gift. Instead, I said each time they had a special moment in their life, let’s put what we would have spent on a present into an education account.

She Wasn’t Always Into It

It took a few years to convince my wife that this was a good idea. But she eventually bought into the concept, and we stopped. We told our nephews and nieces what we planned to do. The little ones didn’t get it. The older ones probably didn’t get it either. Instead of a gift on birthdays, we would print out a statement and send it to them, but until my oldest niece went off to school, I don’t think anyone got what we were trying to do.
We tried to make it super easy for parents, uncles, grandparents and even the kids to contribute. And some did. Grandparents jumped on board and gave what they could.

Don’t get me wrong; this wasn’t all good. There were times we worried our family would see us as the “bad” uncle and aunt. The ones who would show up on Christmas day with our arms swinging, not a gift in sight, but we stuck with it.

The Results

And this summer, we once again were able to see the results.  We just paid for the first semester of my nephew’s college tuition.  Saving/investing requires time. We set up the account for my nephew 6-7 years ago, and in that time, his account was able to earn $2,000. That is $2,000 more than he would have received in gifts throughout the years. Two grand more that he can spend towards tuition, books, housing or a new laptop. We get to spend this money on him to help him increase his earning power and increase his odds of finding employment. If only we would have started sooner, right?Laptop

The added benefit of this approach it gives my nephews and nieces an early appreciation and front-row seat at seeing how investing works. In addition, they got to experience the power of compound interest at work for them.

I know this is not going to be an opinion for everybody, but if you are in a fortunate position where you have children in your life who do not need gifts from you, I would strongly encourage that you set up a similar account for them.

Here Are Some Options

All my nephews and nieces are in the United States. For each one of them, we set up 529⁠ accounts. I am not a financial advisor, but I can say that those accounts provided the ease of setup, easy methods to contribute, and flexibility that our family needed.

My kids both have Registered Education Save Plan (RESP) accounts. Those accounts have the added benefit of the federal government kicking in a maximum of $7,200 in free money. That’s right; if you put money into a child’s RREP, the federal government will contribute up to 20% of your contribution up to a maximum of $7,2000.

All of this to say that investing is a great tool that you can use to save for retirement, build wealth and reach your finical goals, but it doesn’t need to stop there. You can also use it to set up all of the children in our lives for success.

Too Many Toys? Here’s How You Fix It

A reservation I know a lot of parents have about giving their child an allowance is, “Do we want more stuff coming into the house?” I feel you. Like you, I have stepped on more than enough pieces of lego, never to want to see those vile blocks again. But if we’re going to give our little ones the opportunities to manage their own money, then we also need to provide them with the opportunity to bring new things into the house.

But like with all responsibilities, some limits can be put into place. Here is how you are going to manage the new influx of stuff that is coming in – *a toy equilibrium.

Establish a Toy Equilibrium

Do this before starting the allowance, or after a big toy purge. Establish that your house is now at its maximum amount of toys, the number of toys in the home can go down, but it can not go up. If a new toy is going to be coming into the house, that means a toy of equal size, or parts, or whatever criteria you deem fit for your home, needs to be removed.

Too many toysA toy equilibrium is an excellent way for your child to start prioritizing their belongings too. If they are really in need of that new transformer, Elsa, or whatever the latest thing is, then they should be willing to get rid of that other thing that has been collecting dust.

I, unfortunately, have passed along the hoarding gene to my son. I am a collector. Like me, my son does not like to get rid of anything. All trash could be a crafting item, all toys are special to him, and to give something away is always a great offence to him.  I can relate to that, but at the same time, we have limited space, and he has started to come to terms with that. It is still a fight to get rid of stuff. However, post-shopping, I do have him find items that he no longer uses to add to our giveaway pile, and so far, it has worked well.

Creating a Healthy Relationship with Stuff

With great power comes great responsibility. The ability to buy stuff means your little one needs to be responsible enough not to hoard things.  Saying goodbye to toys creates a healthy relationship between your child and things.  The ownership relationship is a critical part of money management.

Is it hard for you to say goodbye to stuff too?  When you do a toy purge, make sure your little one sees you purging some of your stuff also.  Model the behaviour we want, right?  Have you tried a toy equilibrium in your home?  How did it go?

 

* I first read about a Toy Equilibrium in Ron Lieber’s book The Opposite of Spoiled: Raising Kids who are Grounded Generous, and Smart About Money

Empower Your Kids With Financial Literacy

Who does most of the talking when you’re at your pediatrician’s office?  More and more data is coming out that advises parents to let their children lead during their doctor’s appointments.  By allowing your child to take a lead role in their health care, you are empowering them.  But why stop with health care?  You can empower your kids by giving them the space to question your spending too.

Question Authority

A generation or two ago, it was unheard of to question a doctor. Doctors would take offence to you questioning their authority. Some still do, but the medical field is starting to see the flaw in this approach. Many medical professionals now see that people need to take on a significant share of the responsibility for their health and well-being. And that can only happen if they feel empowered to find the information. And you can only do that if you can ask your doctor questions.

But empowerment isn’t just for your health and well-being. We need to incorporate that mindset into all facets of our lives. We have to remember what our ultimate goal is when we are raising children. It is often hard to remember that the purpose of parenting isn’t to get them to eat vegetables; it is to teach them about nutrition so that they can make healthy choices. It is not to administer medicine, it is to teach them about health and well-being so they can make the right choices, and feel comfortable asking a doctor question to ensure they stay healthy. And it is not to buy them the necessities. It is to teach them how to manage their resources.  So that they will one day be able to live and support themselves without our help.

Training Adults

We are not raising children. We are training adults. It is a slog, and it is almost impossible not to get bogged down by the hundreds of tasks, and requests, and assignments, and appointments. But all of those are just the tactics. They are not the objective.

If we do our jobs well, in the end, our children will leave us and go off to live fulfilling lives as adults. How they define fulfillment may differ from us, but our goal is to give them the skills necessary to define and achieve that fulfillment. Preparing them for adulthood is why it is essential to empower your kids, given them the tools they need to question authorities. Not to be contrary, but to be curious to seek knowledge from knowledgeable people, and then help them to apply it to better themselves.

Empower via Questions

Concerning finances, don’t feel like you are the only authority they can question. There are aunts and uncles, grandparents, and an assortment of skilled professionals in your networks. Make sure you expose them to those trusted advisors. Build those relationships so that they can have a full breadth of information to empower them for what awaits them.

Protect Your Kids Financial Mental Health

Financial literacy is starting to become a focal point in schools. For that, I’m very thankful.  While I believe introducing financial concepts to students earlier would be more beneficial, I’m grateful for the progress we have seen.  But before you think that we can leave your child’s financial education solely to our schools, think again.  Doing so could leave your child’s money mental health in jeopardy.

Financial Mental Health

I’m confident schools will do well discussing the hard facts about personal finance. What is an asset, what is credit, and what is debt? But financial literacy is more than just definitions.  There are a lot of emotions wrapped up in how we use our money.  That is why you need to be involved in teaching financial literacy.

You know your child better than anyone, and I believe you are a better advisor when it comes to your child’s emotional well-being. So while in the classroom your child will get to understand some of the nitty-gritty of finance, you can be there to discuss:

*     How you feel when you buy something
*     How you feel when your savings account is at zero
*     How you feel when you give to charity
*     How you feel when you get paid for work well done

Feelings Drive Actions

I am a big basketball fan, and I live in Toronto.  So when Toronto was in the NBA finals, it was a big deal for me. Over two weeks, I gained ten pounds. Why? I was stress eating. All the tension of the series had me overeating. I’ve known I stress-eat for a while. When I’m down, I reach for sugar and crave comfort foods. There are feelings tied to the way I eat. The same is true for the way I spend and save.

Think back to the last purchase you made for yourself. How did that make you feel? Did you get a little high off of the transaction?  That euphoric feeling can become addictive, and drive our behaviour, just like my stress drove me to overeat.

Whether retail therapy is good or bad depends on you.  But the only way to answer that question is to understand how you feel since your feelings drive actions. I  know what my triggers are for stress eating—knowing that, I can choose how to manage it.  The same is true for the emotions that drive our financial behaviours, like saving, spending or giving.

Talk About Their Feelings

There is a lot of feelings that go into what we do with our money. When we have something in our lives that is not right, we may seek out a councillor to help us deal with our feelings. The hope is that by identifying our emotions and our triggers, we can change how we react. I want parents and guardians to be our children’s first financial councillors. Parents can help children work out the complicated feelings they may have around managing money. As much as I know teachers are there for our kids to talk to, they change year over year. And with counselling, sometimes what you need is consistency.

So don’t be afraid to ask your children how they felt when they had to pay back a loan, or when they finally were able to save up and buy that big-ticket item. Getting them to acknowledge their emotions will better enable them to have healthy financial mental health habits and give them the tools to deal with those complex emotions on their own.

Piggy Banks – Why You Need To Toss Them Immediately

How many of your kids use piggy banks?  Ok now think about your family budget.  Do you just toss all of your money into one account, or do you divide it into chequing, savings, retirement, investment, emergency funds? If we want to teach our kids how to segregate money into different accounts, we should help them, and we should help them early.

Stop Using Piggy Banks

I don’t know the historical origins of a piggy bank. But regardless of where they came from, I don’t see how pigs have anything to do with money, and I think piggy banks are a terrible way to have kids store their money.

First off, you can’t put in bills easily, and if you are Canadian, some coins won’t fit either. Once the money is in, you have no idea how much you have. Which one of you would keep your money in a bank if you couldn’t see the balance? Then either the bottom comes out too easily, and money rains down on you, or the hole in the base is too small, and you can’t get anything out.

Bad at deposits, balances and withdrawals? Banking shouldn’t be this hard! Toss those piggy banks out!

A big part of money management is compartmentalizing the money you have. I’m sure you do this all the time. I have a paycheck coming, part of it will go to rent, some to groceries, and some to entertainment.

That compartmentalizing is easy for us because we have had practice. But even with practice, we still like to put up barriers to the different compartments. This is why we have savings chequing and retirement accounts.

We need to do this because money is money. The money in my savings account is the same as the money in my retirement account. The only way to distinguish them is to set up some compartment, or in this case, accounts to separate the two. In economic terms, they call this fungibility.

So why are we not doing this with our kids?

A Better Way for Your Kids To Keep Their Money

What is the simplest way to delineate money for different purposes? Put it in different places.

When I started my son’s allowance, I found three clear jars with wide openings and twist on lids.

We labelled each jar.
Save – this is equivalent to a savings account which he uses to save up for something special.
Spend – This is his chequing account for buying smaller things that come up
Give – This is his donation account that he uses to be philanthropic.

Why Clear Jars.
Deposits/Withdrawals – easy to open and put money in or take cash out
Balance – easy to see your wealth increase and decrease at a glance

By keeping his money in three jars, he is building the habit of budgeting and accounting. By using clear jars, he can keep a tally of what he has. It is not hard for him to get a statement of his accounts with a glance. And by making the jars easy to open and access, it makes his money easy to access. The idea of having to find a hammer to access your money might sound like a wise saving strategy to some, but trust me,  it is not.

I love the three jar method. I think it is simplicity at its finest. How better to teach accounting without having to teach accounting?

Toss those piggy banks and let me know if you have tried this method and how it is going for you.

Are We Rich? What to Say When Your Kids Ask

Hey Mom, are we rich?  Has your child asked you this question, or it’s opposite, “Are we poor?”. We have and it is a doozy.  Here is how you can deal with this question when you get it.

Let me start by repeating something I’ve said a few times. I’m very fortunate. I grew up with all my needs met, and I currently do the same for my children. I acknowledge that much of that privilege came from the luck of the timing and place of my birth. Had I been born somewhere else, or at some other time, I would not have had all the opportunities that I did. I also acknowledge that I have worked for what I have.  But just the fact that I was able to be educated, to be in a position to work, makes me one of the lucky ones in this world. So with all that said, yes we are rich.

Us vs The World

If we compare our situation to the vast majority of the people in the world, we would have to acknowledge that we are rich. Are We Rich Vs the WorldThe majority of the world makes much less per person than that of my family and me. And that is true for most of the people in my community. I have to believe that would also be true for most of the people reading this. According to where most of my readers are based, and those countries average income per/capital. Which means by those standards, we are very well off.

Us vs The Neighbourhood

But let’s be honest, when our children ask are we rich or poor questions they are not comparing us to households around the world.  They are Are We Rich vs neighbourhoodcomparing themselves to their friends down the street. They want to know how their family stacks up compared to the friend with a new pair of Jordans on, or a Nintendo Switch. Are we rich compared to those families?

I think this comparison starts early.  Our kids are not much different than us. I won’t pretend that I don’t look at clothing, cars, and other items and try to estimate where I fit economically compared to my peers. I like to believe that I don’t, but I would be lying if I said I didn’t. But with age and a bit of wisdom, I think that whatever mental calculus I do when I see those items I still treat the people I meet the same way regardless. It may be hard for me to stop doing mental math, but it has always been easy for me to treat people as people, I thank my parents for that.

What’s the  Answer?

If this question comes up, and I am positive it will come at some point, I would suggest you avoid diving deep into your pay stubs and tax returns. Start by asking a simple, “Why do you ask?”.  In addition to buying yourself some time to formulate an answer, it will also give you a chance to address what is at the root of your child’s question. Maybe they are comparing what they have versus what other’s don’t or perhaps it is something altogether different.  First, try to get to the cause of the question before you dive in.

Regardless of where your child is coming from with the question, I would suggest you work on defining the terms “Rich” vs “Poor.”  In our family being rich is as having enough money to cover all the needs of your family.  This is a great time to identify needs vs wants if you haven’t already done so. If you have all your needs covered and you have money left over to buy your wants I consider that rich. Poor, on the contrary, is when you do not have enough money to cover all of your needs.

Definitions Matter

With that simple definition, it is easy to understand why we can feel poor while we are some of the wealthiest people in the world.  If we start to believe that having the newest smart-phone is a need, but we can not afford it, then we will feel inferior.   Similarly, people with very little can feel wealthy if they want for little.  I don’t want to stray into the ills of consumerism, but if you get into this discussion, you can easily segway into how wanting more can make you feel bad.

It is easy to grasp the “keeping up with the Jone’s” effect.  The more we see others have, the more we want, the more we want, the less we feel like we have.    To counteract this effect, we practice gratitude.  I think it is essential to fight against the endless want so that we can appreciate what we have.   

Be Honest

If this question arises for you.  Be honest about your situation.  Provide your children with both comfort and clarity. Let them know that you, as their parent, will do everything in your power to supply them with all the needs that they have.

If this question arises out of wanting for more stuff let them know that not getting all of their wants met, right when they want them is a good thing too.  Remind them how much more valuable items feel when they have to save.  Remind them how fortunate they are.

“Are we rich/poor?” is not an easy question to answer, but answer honestly for your situation, and you will be fine.  Let me know what you have said to your little ones when this question has come up.

 

 

The Ultimate Guide to Giving Kids Allowances

The Ultimate Guide to Giving Kids Allowances

Starting an allowance can be daunting. 

 How much do you give, how often, what do you let them buy?

 If you’ve been searching for answers, you have probably seen a lot of conflicting information out there.

 In this in-depth article, you’ll learn not only why you should start giving an allowance, but the best practices  for all ages.

Contents

CHAPTER 1:

Should Kids Get an Allowance?

If you are looking for a reason to start giving an allowance, look no further than the latest headlines.

  • Outstanding student loan debt reached an all-time high of $1.41 trillion in 2019.
  • 75 percent of Americans are winging it when it comes to their financial future      
  • Year over year, money is the number 1 cause of stress among Americans

    More debt, less planning, and more stress.  All of these headlines are due to a growing lack of financial literacy.  Financial literacy is just a fancy way to say an understanding of how to make informed financial decisions

Should Kids Get an Allowance?

Poor financial literacy skills lead to people of all ages spending more on fees, saving less, and in general, making financially poor decisions.  On the opposite side of that coin, in addition to having higher savings rates, and paying less in fees, 87% of Americans agree that ”nothing makes them happier or more confident than feeling like their finances are in order.”

What do any of those stats have to do with an allowance?  Experts believe that “allowances are powerful tools” to teach the basics of financial literacy to children.  They note that allowances provide your children with hands-on opportunities to make choices that will directly impact their financial knowledge.

That leads to the obvious question of how effective are allowances at teaching the skills required to manage money. With all the fuss over allowances, you would think that question would be an open and shut case.  But surprisingly, there has been very little hard research to back allowances as a successful means of cementing financial principals into our young ones’ minds. Denise Cummins, Ph.D. and author of Good Thinking, The Historical Foundations of Cognitive Science, and Evolution of Mind combed through the literature for an article in  PsychologyToday.com. She was only able to find one   of purport published 1991 that demonstrated that “receiving an allowance did impact children’s financial responsibility.”

She was only able to find one study of purport published 1991 that demonstrated that 

… children who get allowances are more sophisticated about money than those who do not.

Even with the lack of scientific evidence, we can use common sense and analogies to make a case for allowances.  Managing money is complicated.  It requires not just basic arithmetic, but also psychological discipline.  The ability to delay gratification, manage the feelings of both being better off than some, while also having less than others, all while balancing your wants against your needs.  And that doesn’t even start to include the nitty-gritty of managing debt, investing, budgeting and all the other aspects of money management.

How do we teach complex tasks to children?  Do we show them a piano and expect grand performances?  Do we provide them with a car and expect them to know how to drive?  Of course not. When your child first starts to learn to drive, they begin with the theory.  But that is not enough to get behind the wheel.  They need you sitting beside them.  You are there to coach them.   You start in a safe place, like a parking lot at first. Eventually, you begin to take some side streets, increasing the complexity bit by bit.  Once they have shown their competence, they are ready for the main event, major main roads and highways.

Giving an allowance is very similar.  You start with small amounts of cash; that is their parking lot.  It is a safe, confined space to make mistakes.  You are right there beside them, ready to coach them.  They are still holding the wheel, making financial decisions, but poor judgment now will not cause their credit to tank or creditors to start calling.  As they demonstrate more competencies, you increase their responsibilities.  Soon they will be managing a budget of their own.  But only after they have shown mastery of the necessary skills. 

An allowance is a powerful tool when used correctly.  But giving an allowance alone is not sufficient to teach financial literacy.  Your kids need you sitting beside them to coach them. For example, a 2019 survey conducted by the American Institute of Certified Public Accountants showed that while the vast majority of parents, 92 percent, agreed it is “very important for their child to understand how to effectively manage their money,” only 3 percent of children are saving a portion of their allowance.  Also, little more than 3 in 10 (32 percent) parents are teaching their children about money monthly or less, that is including 7 percent that never talks to their kids about money”.  Those percentages demonstrate an unfortunate lack of engagement on the part of parents.

The allowance plus your guidance is required if you hope to teach your kids life skills that they will need as an adult.  With the combination of allowance and coaching, there are no other tools that can make the same impact on a child’s financial literacy education.

CHAPTER 2

Allowance for Chores?

There is no bigger controversy when it comes to allowance giving.  “Should an Allowance be tied to Chores?”

The short answer is no.  If you want to know why ask yourself what the purpose of an allowance is.

As I noted above, allowances are a great tool to teach financial literacy to children.  But many people disagree that that should be the only goal. Some want to give allowances to teach work ethic.

The thinking goes; how else will my child learn the value of a dollar if I give them money for free?  They need to work for it, just like I do.

Here is the problem with this approach you are building a trap for yourself. 

Allowance for Chores?

The Pay for Chores Trap​

The trap that an allowance for chores creates occurs the moment your child decides they are willing to forgo their pay.  The tasks still need to get done, and you no longer have leverage. 

You have two options:

  1. You can force your child to work without compensation (which was fine before you started to pay them, but now they will claim it is forced labor, akin to slavery),
  2. You can let your child stop working, tasks around the house go undone, and there are no real ramifications to your child (you can’t fire your kids from your family)

Either way, once the trap is sprung, you are not teaching lessons about paid work or how to manage money. Lose-Lose.

While I get the sentiment behind this thinking, the logic is flawed, and the research bears this out.

The pay for chores argument while coached in work ethic is usually a cover for leverage. While you may think that tying an allowance to chores will provide you with the leverage you need to keep your child’s room clean, you may want to think twice.  The idea is that money will be the carrot to get the child doing their chores, and the withholding of the funds will be the stick. 

That goes against the current science on how best to motivate and sets up a terrible precedent.

A brief detour is needed to discuss intrinsic vs extrinsic motivation.

Intrinsic motivation: Curiosity, Challenge, Mastery
Extrinsic motivation: Money, Rewards, Praise

There is no better speaker on this topic than Motivation expert Daniel Pink, in his book Drive he hit the nail on the head when he said

“…if students get a prize for reading three books, many won’t pick up a fourth, let alone embark on a lifetime of reading”

Extrinsic motivation limits creativity, enthusiasm and dedication.
Intrinsic motivation, on the other hand, can fuel internal drive, mastery and ingenuity.

That is not to say that extrinsic motivation doesn’t have its place.  There is a lot of evidence to show charting with rewards can be an effective means of short-term motivation to build good habits.  But do not create an allowance chart for kids. If you are hoping that the use or absence of money will keep your kids in-line doing their chores, you may find yourself in the Pay for Chores Trap.

I know trying to create an intrinsic motivation to finish homework can be a challenge that even I don’t have a solution to, I have to concede that it is the better method for developing well-adjusted adults.

You cannot be a parent and a boss.  If you are trying to teach work ethic, help find your child summer or afterschool jobs.  A real boss will ensure your child understands work ethic.

Money as a motivator only goes so far.  On the contrary, it may harm your attempts to build a strong work ethic.  Don’t fall into the Pay for Chores Trap. If you need to take something away for incomplete chores, take away a privilege. They should get their allowance regardless of the tasks they complete. The money they receive is their chance to practice only management.  Just as you would still have your child go to piano lessons if their room was a mess, allow them to practice handling money even if their socks are always on the floor.

Do not take away essential practice time, and don’t tie chores to allowances.

CHAPTER 3

What is the Appropriate Age to Start an Allowance​?

 The sooner you start, the better.  The more time you give your child an allowance, the more time you give them to learn as much as possible. Also

“The sooner they learn, the more likely it will stick when it matters most,”

says Eric Pucciarelli, the Vice President of oXYGen Financial.

 

What is the Appropriate Age to Start an Allowance?

When determining when your child should be given an allowance, consider these two factors: interest, and ability.

If a child is showing an interest in money or as Kristan Leatherman coauthor of Millionaire Babies or Bankrupt Brats? puts it,

“The best time is when your child begins to understand that money can buy him things he wants.”

Don’t forget, kids also need to be able to do some basic math.  Kimberly Palmer, the author of Smart Mom, Rich Mom believes you should start

“as soon as they grasp the concept [of money].”

The goal is to keep their interest and to hone their skills.  If the interest is there, but not the ability, keep them engaged by including them in financial discussions until they are ready to do the math required.

If they are not ready at age five, do not force the issue, wait until they can do the math required to handle money on their own. Keep in mind that dealing with coins involves an understanding of fractions.  But even without a full grasp of fractions, you can start the practice.  Usually, around seven years – Grade one, they have acquired the necessary arithmetic skills they will need.

If your 4-year-old is showing an interest in money and they can distinguish between the different dollar and coin dominations, then, by all means, start giving your little one an allowance.

Lastly, if you are reading this and you have a preteen or teenager, and you haven’t started an allowance, it is not too late!  Remember, an allowance is a safe place to practice money.  Getting some practice will always be preferred to no practice at all. 

CHAPTER 4

How Much Should Kids Get for Their Allowance?

You will have to determine what works best for your family.  

How much you give depends a lot on your financial situation, how many kids you have etc.  So only use the following as guidelines.

 Don’t let the following suggestions discourage you from an allowance and don’t stress over how much. 

Remember, the intent is to give your child practice using money. 

To find where you can find money to support your child’s allowance read the “What Should Allowances Be Used For” section below.

How Much Should Kids Get for Their Allowance?

Weekly Allowance Amounts

Most parents give either 50 cents or one dollar for every year of age weekly.

So, a 7-year-old child could receive a weekly amount of $3.5 or $7, respectively.

The going rate for kids’ allowance

Moneyroster.com 2019 survey shows the average allowances from ages 4 – 14.  As you can see, the amount is in line with the 50 cents – $1 amounts noted above. 

 In our family, we have gone with the $0.50 approach but rounded up.  So, my 7-year-old is receiving $4 per week.  We wanted to start low so that we had wiggle room to increase the amount as my child grows, and his wants and needs also grow.

 A few other things you should consider when determining how much to give:

  • Will the allowance be used to cover necessities such as lunches, clothing gifts for friends? (See guidelines below for more details)
  • Can the amount be easily divided into savings/giving/spending “accounts”?
  • What will your child be buying? Will they be able to save up for their significant wants with the allowance they receive without getting discouraged? (Don’t forget to factor in any additional money they may receive from working or birthday gifts when doing this calculation)

CHAPTER 5

Allowance Use By Age

This is where a lot of parents get tripped up when giving an allowance.  Allowances are not “extra money.”  

Allowances should replace one or more of your current budget lines. In other words, rather than you buying stuff for your child, you should provide them with money to buy for themselves.

For example, carve out some money from your grocery budget, and have your child manage their lunch budget.  Your child should be using their allowance to buy what you would have been buying for them.

What is the Appropriate Age to Start an Allowance?

Toys, lunches, clothing, personal hygiene are all items they could be purchasing for themselves.  While they do, they will be learning how to budget, and stretch a dollar.  Let them keep what they don’t spend so that they can reallocate money to their priorities.  So, if they want designer jeans and are willing to eat a month’s worth of peanut butter and jelly to sandwiches to buy them, let them. 

The key is that you cannot bail them out with extra money or by buying for them.  If you want your child to learn money managing skills, you need let them figure it out.  You will find your children are much more economical when they have to spend their money on themselves.  The beauty of this is that you do not need to find “extra money” to support the allowance; it is money you were going to spend on them anyways. 

As your child becomes more comfortable with money, they should be able to take on a more significant share of the purchases for themselves. By the time your child is in their late teens, they should be managing most of their purchases. That, of course, will not be where you start with your 5 and 7-year-old, but this is where you need to end up.  Let’s take a look at the differences in allowances by age.

Allowance for Ages 5 to 9-Years-Old

When you are first starting your allowance practice, especially if you start with children younger than 10, you will find the focus will be on toys and maybe treats. 

Remember you are giving your child this money in part to empower them; to allow them to make choices.  You can and should put some boundaries around their choices, but not so much that they do not feel like they can buy what they want. 

One tool that can ensure some boundaries is a “Do not buy list.”  Do not make this list overly long or complicated, and you can always add more to it later.  For example, our list only includes two things: treats (gum, candy, chocolate, etc.) and toy weapons (guns, knives, etc.).  But as my kids get older, it may include inappropriate clothing or violent video games. 

Allowance for Ages 10 to 14-Years-Old

By this stage, if you have started early, you can start to transition that discretionary toy budget into something more tangible.  Maybe a lunch budget that your child needs to manage.  Around nine years old is the prime age to begin increasing purchasing responsibilities. 

Make sure you are increasing their allowance as they age.  Also, make sure that you continue to focus not just on spending but setting and hitting savings targets.  Saving is a critical part of managing money, and your child will need your support to master that skill.

Allowance for Ages 15 to 17-Years-Old

By this age, I would no longer consider this an allowance per se.  If you started early and your child has mastered many of the allowance skills by this age, they should be receiving a monthly budget.  It may be a good time to switch the weekly pay to a bi-weekly payment to help them get used to standard pay periods.

While you will still likely be providing them with breakfast and dinners, they should be managing their lunch, clothing and hygiene budget and any discretionary spending.

If they find that the amount they are getting from you is no longer sufficient, encourage them to get their first jobs.  First jobs are opportunities to develop the work ethic that we hope they carry into their careers.

CHAPTER 6

About More Than Spending

Don’t forget that an allowance should not just be about what your children can buy for themselves.  A portion of allowance money should be set aside for donating. 

Why donate? Giving is essential in both developing financial skills and contributing to well-being.  Paradoxically giving makes you feel wealthy and happy.  Additionally, if your child focuses only on spending money, they may become shallow and self-centered.

 

Giving provides an opportunity to think about the privileges we have while also contributing to solving big problems.  Just as you help your child set savings targets, help your children find and donate to a charity that resonates with them.

CHAPTER 7

Guidelines in Less Than 12 Steps

Here are 11 steps to follow to start your allowance practice.

 1. Define your frequency and be consistent. Start with weekly and move to bi-weekly when your child is in their teens. That consistency will give your child a chance to start budgeting and saving regularly.

2. Define the amount. Try to make it enough to start making small purchases, but not so much that they don’t have to save for the big stuff.


Allowance Guidelines in Less Than 12 Steps
  1. Have a place for them to keep their money. Forget about the piggy bank and use clear jars so your little one can see their riches grow. Label the jars spend, save, and give. The three jars method is an easy way to start teaching the concept of accounts and budgeting
  2. Explain to your child why they are getting an allowance: to practice using money. A skill they will need for the rest of their lives.
  3. Have your child agree to your Do Not Buy list.
  4. Let your child know that they will not be getting more money outside of the allowance. If the allowance is for lunch or clothes, they need to make it last.
  5. You can lend your child money to get them into the habit of paying bills, but as a rule, try not to lend them more than one week’s allowance. Make sure they pay it back.
  6. Help your child define savings goals. Remember to reset savings goals once they meet the target.
  7. Help your child find ways to donate a portion of their allowance.
  8. Let your child know what, if any, behaviour will cause the allowance to stop.
  9. Use the allowance (the giving, the buying, the saving and everything in between) as teachable moments. The allowance alone is not sufficient to learn the skills required to manage money.

CHAPTER 8

Cash Before Credit

While the world may have gone digital, allowances should start with cash.  

There are countless apps and ways to make giving allowances convenient for parents.  But your convenience is not the purpose of the allowance. 

Why Cash? It is tangible. A child can see how much money they have, and interact with it.  

If their money jars are empty or overflowing with cash, they will have a better understanding of what they have than digits on a screen.

While the world may have gone digital, allowances should start with cash.  There are countless apps and ways to make giving allowances convenient for parents.  But your convenience is not the purpose of the allowance. 

Why Cash? It is tangible. A child can see how much money they have, and interact with it.  If their money jars are empty or overflowing with cash, they will have a better understanding of what they have than digits on a screen.

The other advantage of cash is the cognitive connection made when a child exchanges physical money for a good or service.  Making that mental connect and experience the feeling associated with that transaction is a necessary part of understanding personal finance.  Transacting in cash makes that connection happen quicker.

There is no end to the great apps and cards out there designed to help you manage allowances.  RosterMoney and the Greenlight cards have been receiving some excellent reviews.  But do not go digital too early, have your child master cash, before cards or apps.

CHAPTER 9

Final Take-Aways

Once you have started giving an allowance, stay consistent.  

Stay positive and give your little one the freedom they need to experience all the highs and lows of buying, saving and giving. 

Do not be overly regimented. Don’t forget the purpose of the allowance is to let them take the lead.

Allow your children to make mistakes.  We can learn more from our mistakes than our successes.  

 

Final Take-Aways

Losing money, buying something cheap rather than delaying gratification for the well-made version, or losing a toy that was not adequately secured, are all aspects of having and using money.  So, don’t deprive your children of these moments.  Their small losses now will protect them from more significant losses later.

Once you have started giving an allowance, stay consistent, stay positive and give your little one the freedom they need to experience all the highs and lows of buying, saving and giving. Do not be overly regimented. Don’t forget the purpose of the allowance is to let them take the lead.

Don’t let the learning stop after your initial conversation.  For allowances to be beneficial, it requires both the exchange of money but also the exchange of knowledge, therefore remain an active participant in the allowance process. Help them set savings goals and find worthy causes to donate to.  Use all aspects of the allowance as teachable moments to keep the conversation about money going.

Last take away.  Giving an allowance is a fantastic gift, but it also requires that you give up a lot of control.  Up until this point, most parents would have had all of the buying power.  The allowance equalizes this power disparity a great deal.  Don’t let that dissuade you.  Remember, we are raising adults.  The goal is to get them to be self-sufficient members of society.  We need to empower our children, and this is an excellent method to do so.

Need more tips for teaching your kids about financial literacy, go to CliftonCorbin.com or subscribe to my newsletter. 

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