Saturday, March 19, 2011

A Bit About Allowance: How does this seemingly simple question make you feel?

Today I drew a card from my yellow Conversations To Go box and it posed an interesting question “What subject do you least like talking about?”

For my parents it was definitely allowance. When determining the how to’s of allowance so many issues come to mind it can make it difficult for many parents to even start an allowance program with their children. But, this subject is definitely one that needs attention.

Researchers have shown that children learn about money primarily from their parents, so it shouldn’t be strange that I say let them learn. As many would agree, learning by doing is an effective way to grasp a concept, so let’s examine the ins and outs of allowance in hopes of using this simple mechanism as a path to financial savvy. If a child is provided with a fixed income they can learn how much things really cost. At first they might spend it too fast, but over time they will learn to budget. When they go to the candy store and spend their entire week of allowance on Monday, they won’t be able to buy the toy they want on Wednesday. It seems simple enough, so why is this such a sore subject with parents?

Well many complicated dynamics go into establishing an effective allowance program. What determines how much a child should receive certainly gives us something to think about. Some say link it to chores, while others may argue that chores are a responsibility as a member of a family and should be done regardless of pay. So, it might be necessary to have a fixed allowance and leave the option for children to do extra work (like washing the car) for supplemental income. Linking allowance to behavior could potentially diminish the important lesson to be learned from fixed income - if Sally is bad this week then she doesn’t get any money. How might this fluctuation affect the budgeting she is trying to learn about? With that being said, look at your household’s financials and see what works best for you. Might a percent of income fit in or should you maybe give X amount of dollars per year of age?

Now that they are receiving money, it is important to keep the discussion going and supplement your child’s understanding of money and its value. Make sure to set goals and periodically assess the progress toward achieving those goals. It might also be helpful to help your child set up a budget and consider sharing your household budget with them as an example. This will also help them understand why they can’t always get every type of snack food they want when at the supermarket. They will begin to realize that things cost money and how some things are more important to buy than others.

A great idea to further the concept of budgeting is to allow children to separate the money they receive into three distinct categories: saving, spending, and sharing. The amount to save can be explained by their goals - that new bike in three months is going to cost X dollars so get to saving. The spending category can help to determine the importance of short term spending - is candy today worth not being able to get your new bike on time? The importance of sharing is often over looked and can often yield significant dividends when instilled at a young age. Get a list of various charities and show your child their websites, most likely something that sparks their interest and gets them excited about helping their community.

There are no definite right or wrong answers to many of the tough questions dealing with allowance, but it is an important tool to help grow/raise financially capable children. So, it is worth it to invest the time, assess the possibilities, and teach your child the fundamentals of saving, spending and sharing.