Teach Your Kids About Money with an Allowance
Taking the time to learn wise financial strategies and putting them into practice has a great impact on your children.
Research shows that most parents worry that their children will be worse off financially than they are. Even before the pandemic, children were falling behind their parent's generation financially. So, what you teach them about money is likely to stay with them for the rest of their lives!
Besides managing your own money well so they mimic positive financial choices, you can also teach your kids the practices of frugality, budgeting, saving over time, and much more with effective use of an allowance.
Starting an Allowance
Try to recognize when your child is ready for an allowance. If you begin too soon, your child won't comprehend the value of the money he receives. Typically, a good starting time is when the child is old enough to understand how the allowance system will work.
Allowance Systems
There are three types of allowance systems from which to choose:
- Gift System. The gift system is simply a weekly payment to the child. The money isn’t given based upon any work/chores the child does or fails to do. The child gets the money just for being part of your family.
- The advantages of this method are that it is consistent and unchanging. There are no decisions that need to be made.
- There are many disadvantages:
- The child is less likely t truly appreciate it.
- He desn’t gain a sense of achievement.
- The child is als unlikely to develop financial responsibility when the money is just given to him and he's done nothing to earn it.
- Reward System. The reward system is the most widespread system parents utilize. Parents establish a list of chores for the kids to perform on a weekly basis and then pay an established amount for the successful completion of the chores.
- The advantages of this system are that there are penalties for not doing the assigned chores and rewards for doing them. So this system has both reward and punishment built into it.
- The disadvantages are somewhat difficult to see when the kids are younger, but the reward system sometimes results in a child that only wants to do something if it's part of the established list.
- Income System. The last system, the income system, is similar to real life. When there is a task to do that is not typically expected of your child, he gets paid to do it. Basically, you want to create an allowance that is paid to your child for work beyond the normal responsibilities.
- This allowance will vary, but it seems to have a more positive impact than the other two systems. So you could have a simple chore list that the child must complete without financial compensation, then any other work beyond that list would result in receiving the allowance.
If you're serious about providing your children with some financial knowledge, an allowance can be a meaningful part of that education.
“Having regular discussions about money with your children in conjunction with an allowance system will give your kids a great head start,” says Gary Isler, Senior Vice President for David Lerner Associates. “Don't just hope for the best; give them the best chance possible for a bright financial future.”
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.
Member FINRA & SIPC.