It’s been a year since I started writing this column and I have gotten many questions from readers—every one of them about allowance.
"How should I start a first-grader on allowance?" "I don’t see what they need an allowance for—they don’t really spend money on anything and we don’t want to pay them for chores." "My husband is keen to start our 7- and 8-year-olds on allowance and talks about dividing it into saving, donating, spending, but I think they’re too young."
This angst over allowance is justified. Children are too young for allowance before about age 8—especially when they have not yet learned what to do with money. Bottom line: If we start teaching our kids about money by starting with allowance, we have missed the first critical steps of money education that will eventually make allowance a successful financial lesson.
Getting smart about money is a four-lesson process, with allowance at the end of the line:
• Teach children they have four choices for money: save, spend, donate and invest.
• Help them set goals for each. Then let them practice dividing up money they receive as birthday or holiday gifts or the money they earn themselves. Help them divide up the money in a way that allows them to achieve their goals for saving, spending, donating and investing.
• Use only coin and currency. Young children do not understand the complex concepts of debit cards and checks. Heck, many adults have trouble with it. But we all understand cash. Even kids know that when the coins and currency are gone, they’re gone. They can see it move out of their wallets and into to someone else’s hand.
• Introduce allowance. When this happens has less to do with the age of the child and more to do with their financial maturity. Children are only ready for an allowance after they have demonstrated the ability to manipulate all four money choices and have set and realized many goals for all four money choices. This will take a few years. Allowance really gets meaningful in about fifth or sixth grade.
Kids need hands-on tools
How do you introduce choice and goal-setting to children? There are many ways but, as with any other parts of parenting, it’s always nice to get some expert help.
That’s why, after several years of teaching kids about money, I developed the two products I sell through my company, Money Savvy Generation. I realized children need a hands-on tool that helps them remember their choices and entices them to set goals. And parents—especially parents who never learned about financial management when they were growing up—need help teaching them how to make choices and set goals.
The Money Savvy Pig is aimed at younger children and the Cash Cache Beginning Personal Finance Organizer is aimed at older kids.
The Money Savvy Pig piggy bank has four sections—save, spend, donate and invest. It comes with a booklet that includes goal-setting stickers to help parents teach children how to set goals and make meaningful financial decisions.
The Cash Cache is based on the same approach, but is aimed at older children. It has see-through mesh pockets for each choice. The book that accompanies this product offers templates for setting goals and managing budgets.
I know there are other products out there and, while I happen to think mine are the best, I don’t mean to use this column to sell you on one product over another. My goal is simply to help you see that money management is a skill that must be taught and, even if you happen to be one of the millions of adults who feel as though their own money management skills could use some polishing, you can teach your children well, with a little help.
The key is to teach the four lifelong money lessons. Even if you simply get four jars—one for saving, one for spending, one for donating and one for investing—and use this column to start the lesson, you will be taking a good first step.
But please remember: Allowance is not the place to start. It is the place to end up.
Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the skills of basic personal finance, www.MoneySavvyGeneration.com. E-mail her at Susan@MSGen.com.