Learning Financial Literacy

I still remember my first allowance my mother gave me for doing chores at home when I was just five years old. I saved them in a piggy bank for toys and books, and from this I learned about the value of the dollar and very quickly how to budget. Sadly, money management usually isn't something we're taught in school. If we're lucky, our parents have strong money skills and pass them on to us. If we're unlucky, we pick up our parents' bad habits and may spend a lifetime trying to correct them.

The parents can, however, be proactive with their children and one of the greatest teaching tools is the allowance. What exactly an allowance means? Is it an entitlement – since every kid gets it, or a salary that kids get paid for work done? It can be either of these things, but consider the lessons learned from either approach: what do kids learn when they're given money as an entitlement? Treating an allowance as a salary for work has its drawbacks as well. Kids should be contributing to chores around the house as part of belonging to a family. If children need money to help around the house, it may end up as the only motivating factor toward chores.


Parents should use the allowance as a teaching tool for saving, spending, and budgeting and as a discussion point with the kids regarding the uses of money. How big should the allowance be? If all the child's desires are met, there's no need to budget and no lessons are learned. Children should have to make choices and learn to save for what they want. There is no hard dollar value here, but if the kids are able to easily buy all the toys and treats they desire, then it might be useful to shrink the allowance.


How much control should parents have over their children’s spending? Children should be allowed some degree of freedom, but there also needs to be ground rules. Parents should encourage savings and charitable habits. For example, smaller children can be given different piggy banks for saving, for spending, and for charity, or even a savings account at the bank. Older kids can learn the lesson of compound interest with interest earning savings accounts. I still remember as a child being taken to the bank by my father after birthdays and Christmas to deposit my cash gifts. He showed me my account balance and the interest I have earned.


What about paying when kids go above and beyond the call of duty? Though basing an allowance solely upon work done has its drawbacks, "extra credit" for more difficult tasks can be a good idea. In this case, pay should be based on the difficulty of the task and the time it takes to complete. Parents should use allowances as a teaching tools and talk to the kids about their spending and savings habits, set some ground rules, and lead by example. Financial literacy and strong savings habits are the foundation of a successful financial future and one of the precious gifts that the parent can give to their kids.