Children & Money: Teaching the value of money through allowance.
Image by Chris_J via Flickr
When I was growing up, I had an allowance with no strings attached. My parents never really explained to me why when I was young. I just enjoyed it. Who wouldn’t? Now that I have a family of my own, I had to figure out what to do for my children’s allowance. I know I managed my money well when I was young and accounting was even a career I thought of … I learned many things that weren’t explained to me that I now understand.
My wife and I discussed a number of points and settled on some behaviors we wanted to re-inforce.
Learn To Spend
One of the mistakes many young adult make when they start making money is that they can often spend more than they should and can lose control of their finances. They essentially don’t know how to spend or control it. Learning to spend is something you need to experience to learn. This is a behavior we want to teach our kids very early. Our strategy for them to learn is to let them spend their money as they wish to experience the consequences early. Obviously, there are limit to what they can buy, it’s not what they want but what they are allowed to. Now that the parameters are established around the buying guidelines, it’s basically their choice to buy a book, a magazine or songs from iTunes for examples. They need to know how much money they have and use it.
The results has been quite positive. We don’t get a constant stream of demands and asks since they know it’s their choice to decide if they want to spend the money on the items or not.
Learn Accounting
With a regular weekly allowance, the piggy banks weren’t enough. We opened a bank account for them where the allowance is deposited regularly. The automatic deposit was necessary a couple of years ago as they were spending the coins a little loosely… The bank account help them save to think about bigger purchases. At this point, they started tracking how much they have in a notebook and adding it every time they receive their allowance. Our oldest has been tracking her allowance to buy an iPod touch. (A purchase not yet approved … where do you draw the line is a totally different topic)
Learn About Interest
The benefit of the bank accounts for the kids is that it comes with a high interest account that generate interest every month. Since they track their funds, they have been curious about this money from the bank. It made for a good stepping stone to discussing the benefits of saving money and generating interest from it. My oldest has now seen the monthly interest grow in her account and understand the correlation between the amount in the account and the interest earned.
Growing Positive Behaviors
My children are still relatively young, but these behaviors are in place now and we can build upon it. We decided early not to link allowance with chores. Otherwise you can risk going down the path where they ask for money for everything they do. Chores are simply chores that need to get done as a family. You’ll notice that saving isn’t covered either. My intention is to start them with a couple of shares to DRIP to show and experience compound growth. I’ll have another post dedicated just for that as the time comes.
We use to hear them tell us to just use our card to buy items. They have a much better understanding now. They understand that the card is tied to the account and it needs to have enough money.
Readers: What has been your experience with allowance?
I received a very small allowance up until I was 11 or 12 or so; then I worked as a paper boy and later on continued to work odd jobs every now and then while receiving a little bit for lunches and things like that. I wasn’t too good at managing money until later, though.
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I agree with everything you’ve said here with one caveat. In our house we’re hesitant to give a straight allowance. We don’t want our kids to get used to the idea of getting money for doing nothing. So we use chore charts and other responsibilities around the house where the kids have a chance to earn money. The harder they work and help out, the more money they earn. They still get the benefits of learning how to manage their money but they also begin to understand the importance of earning money as they get older.
Rewarding for doing chores is an on and off discussion we have. I am not against it as long as it doesn’t turn into a ‘how much are you give me to do this?’ for everything we ask.
I totally agree. And I think it’s up to the parents to teach the difference in philosophy too. It definitely is easy for the kids to develop the “how much will I earn” attitude and you have to be careful to avoid that.
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Very interesting topic… Was wondering how old your kids are?
“My intention is to start them with a couple of shares to DRIP to show and experience compound growth.” – do you mean to open for them account in discount brokerage? but in this case you will be paying Management fees in range $50-$100 and every trade also will be pretty expensive.
Also, what is tax implication if you open CASH account for your kid?
With Computershare and CIBC Mellon, you can open an account for free and I transfer a share I have in their name (or in mine due to them being minor) and then they can contribute to the account. The ‘transfer agents’ allow for fractional shares. It makes it a perfect vehicle at no fees!
Here’s our “The allowances post”:http://nicoleandmaggie.wordpress.com/2010/11/16/the-allowances-post/
Too bad I can’t open TFSA for my kids… They should’ve allow it from age 14 or 16 IMHO.
Generally, what are Canadian laws saying? Can I open CASH account in bank discount brokerage for my kid 15 y.o.? If yea, should he fill out taxes and pay taxes on dividends?
I am not sure about opening a discount broker account. I know that with the transfer agents such as Computershare and CIBC Mellon, you can open an account In Trust but you have to be careful with the taxes as the attribution rule may kick in. This is really a good question for an accountant. I need to dig further into that. I just got all the shares I wanted and I am going to start the process soon. I’ll get some more information on the attribution rules with respect to investments in the kids name.