Toronto mom Blake Eligh was determined to teach her kids key financial lessons before they had to go out into the world on their own. She did this, in part, by giving her two daughters decision-making power over their own money from a young age. She and her husband set the girls up with both an allowance and a savings plan when they were eight and 11 years old. Now her kids are 12 and 15 and Eligh only wishes she’d started earlier. “Giving them a chance to learn about spending money at this point allows them to make financial mistakes when it doesn’t really count.”
But what do the experts say? If Grampa hands your kid some cash or they’ve saved up a bunch from weekly allowance, should they get to spend it all however they want?
Learning financial literacy the hard way
When it comes to teaching your kids about money, there’s a simple rule to remember: Kids learn best from their own actions. That’s why Nancy Bisogno, a district leader at TD Bank who’s worked with elementary schools on programs that teach kids about money, encourages parents to give their kids as much financial freedom as they can. “There are two big lessons that can come out of letting a kid spend money how they like,” says Bisogno, who is based in Stratford, Ont. “One, which we can all relate to, is buyer’s remorse—when we purchase something before realizing that it’s not worth it. The second is realizing, I can’t afford this. This puts the cost of things in perspective, which kids don’t always understand until they have their own money to spend.”
Chelsea Brennan, a former hedge fund investor and the founder of Boston-based Smart Money Mamas, acknowledges how hard it can be for parents to watch their kids waste money or be demoralized by their poor spending decisions. But it’s an important lesson to learn while the dollar value is still relatively low. “We want to stop them from making those mistakes, but we need them to experience making a wrong decision,” she says. Eligh’s daughter Grace once saved up for a particular doll with articulated joints, which she had been coveting for a long time. “Within a week, both the hands had come off irreparably. That was really disappointing for her because she’d spent a lot of money,” Eligh recalls. Still, Grace learned not to buy that brand of doll again, and to think hard before spending that much money on one single toy.
Starting money lessons early
Brennan suggests starting an allowance as young as four or five years old, or when kids start asking for money or wanting to buy things from the store. “Begin by giving them some spending money, and then when they get a little bit older, start spreading it out into different kinds of goals,” says Brennan.
In Eligh’s house, they started the allowances off small at $2 and $5 per week, just enough to buy a treat or a trinket at the dollar store, and have recently bumped it up to $5 and $10. Once your child is able to get the hang of how spending money works, you can set up a system that includes spending and saving. For Eligh’s kids, one-third goes directly into a savings account and the other two-thirds can be spent however the girls like. “If they want to invest those two-thirds in gumballs, that’s fine. They can do whatever they want with that portion of the allowance. But the stuff in the bank—we need to have some discussion about how that will be spent.” Brennan’s young sons divide allowance up into thirds: a third to spend, a third to save for larger purchases, and a third to give to someone else.
While we shouldn’t micromanage every dollar our kids spend, that doesn’t necessarily mean they get carte blanche either. Brennan talks about what she calls a family’s money values—and that it’s important for parents to decide what their own financial mindset is before they guide their kids. “What values do you want to focus on through your spending? What emotions are you trying to create with your money? Are we prioritizing education? Are we prioritizing feeling charitable or feeling joyful?” she says. Those values can then help establish the parameters for how your kids are allowed to spend their own money. Some parents will insist their kids set aside a certain amount for charity (or for “sharing,” as Brennan calls it with her own young kids), for example. Or they might enforce a hard ban on specific types of items, such as toy weapons, violent video games or makeup.
As kids get older, the basic premise of letting them spend their own money within the boundaries of the family’s values doesn’t really change. What does change with age and independence is the type of things they want to spend their money on. Brennan sees this as a great opportunity to give your children more responsibility for their spending alongside, perhaps, a more generous allowance. “When we give our kids money, one of the things that’s helpful is telling them what that money is for,” says Brennan. With younger kids between the ages of three and eight, say, you might tell them their money is for toys or treats.
As your children move into the tween years, you might want to expand that to include outings with friends. And then, by the time your kids are teens, they may also become responsible for paying for a cell phone or subscription services, for example. “That might mean increasing their allowance by taking money that you would have spent on them and putting it in their hands. Saying, for instance, we budget this much a year for your clothes. We expect you to have a winter coat and so many pairs of pants and an outfit for holidays, but you decide what that is,” Brennan says. This gives the opportunity to start budgeting and thinking about bills before they’re out in the world on their own.
Modern tools for modern families
Cash is the best learning tool for younger kids because they can see their money accumulate and count it themselves. But Eligh found that keeping enough cash on hand for allowances was harder than she anticipated. So for the sake of consistency, her family keeps a binder in which they track money coming in (from allowances) and out (via online and in-store card payments) and then they settle up with cash every so often.
Older kids might like to keep a bit of cash on them as well, but there comes a time when having their own debit card makes sense. By the time kids are navigating their neighbourhoods on their own, around 12 or so, Bisogno recommends setting them up with a debit card. Don’t forget to train them how to use it safely.
Ultimately, we want our kids to make their money mistakes when they’re still young and the stakes are low. “One of my core beliefs is that money is involved in everything we do,” says Brennan. “Every time we choose to spend money, we vote on what kind of world we want to live in, what kind of businesses we want to support, what kind of policies we want to be enacted. And we can show that to our kids from a young age because they’re actually really good at understanding that.”
Need help managing allowance and chores? Your phone is your friend:
Mydoh: RBC’s new app teaches kids about money basics, helps them earn money from chores and offers advice on spending it wisely. It all starts from a parent account.
RoosterMoney: This virtual chore and money tracker app is nicely designed and easy to use. An upgraded version lets you tie allowance to chores and set an interest rate for savings.
iAllowance: Kids earn rewards for completing chores and parents can set recurring allowances that will pay into any of the unlimited “piggy banks” you set up.
How parents should handle larger cash gifts
Grandma surprises your kids by handing them a $100 bill. What do you do next? When kids are given a decent chunk of change, it’s important to have a consistent rule for how that money should be accounted for. Smart Money Mamas founder Chelsea Brennan says many parents she speaks to are fine with letting their kids spend $20 or so however they want, but prefer to confiscate larger amounts to deposit them directly into savings. She’s not a fan of this approach. “When you do that, you’re taking away their autonomy,” she says. “Some kids can build a mental relationship that saving is my money disappearing, and that’s not going to be helpful in adulthood.” In her house, her kids can spend half of all cash gifts however they want, and then the other half gets divided into thirds (spend, save, give away). Other rules for spending cash gifts can work too, as long as you’re consistent. What you want to avoid is kids getting excited over a large gift and then feel like somebody has taken their money away.
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