Children and allowance
Teaching children to manage money is an important lesson that can benefit kids throughout their lives. Instilling such lessons may be more challenging for today’s parents than it was for the parents of yesteryear because of the reliance on less traditional forms of currency, such as debit cards and smartphone apps. But enabling children to earn a cash allowance can be a great way to teach them fiscal responsibility.
According to a 2015 study by T. Rowe Price, children who receive an allowance are more likely than those who do not to say they are knowledgeable about managing personal finances. The study also found that such kids are more likely to understand the value of a dollar and feel smart about money. Allowances teach kids to learn what it is to earn money and how to save it, spend it or donate it wisely.
When allowance is linked to chores or some other behavior that requires kids to earn the money, such as getting good grades in school, the effect can be empowering. It helps illustrate the point that there are no free rides and that hard work can beget rewards.
Allowances are most effective when parents communicate what the allowance requires of the child. Children should understand from the getgo that they must earn their allowances. Parents can also guide their children into recognizing the smart ways to manage money. However, kids also can be left to make some minor mistakes that can serve as learning opportunities.
How much autonomy children have over their money should be linked to age. Younger children might not grasp the concept of spending and saving just yet. Such youngsters may need to learn from their folks regarding what constitutes a smart purchase and what might be frivolous. Some parents may believe that allowances should be saved or spent on luxuries rather than necessities. This way kids still understand that their basic needs will still be provided by their parents.
CNN Money says parents should use their discretion when deciding how much to give their children as an allowance. Children will likely inflate the rate if they base it on what their peers are supposedly getting, but parents should ultimately decide the allowance amount.