The Blog of Dr. Jim Taylor

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When parents teach their children the value of money and financial responsibility, children learn one of the most important and practical lessons in preparation for adulthood. Unfortunately, these lessons aren’t readily learned in our country today. Americans, with their ravenous appetites for conspicuous consumption, have never been more fiscally irresponsible. Americans, on average, carry over $8,400 in credit-card debt, 20 percent of credit cards are maxed out, only 40 percent of people pay off their credit cards each month, and personal bankruptcy is at an all-time high.

How important is fiscal responsibility? Charles Dickens said it well, “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Popular culture plays a significant role in today’s children’s relationship with money. Popular culture has connected what children have with how they feel about themselves and how they believe others will look at them. And parents can get caught up in the “keeping up with the Joneses.” Popular culture has also caused children to confuse wants with needs. Today, many children believe they need mobile phones, video consoles, and iPods, when these products are simply desires rather than necessities. This connection between self-esteem and consumption among children and parents alike has led to an epidemic of, at best, profligate spending, and, at worst, financial irresponsibility and ruin.

Because of this out-of-control consumer culture in which our children are immersed, the earlier they learn about fiscal responsibility, the better off they will be. There is no more impactful tool for teaching children fiscal responsibility than allowances. Yet, more often than not, parents are their children’s personal and 24/7 ATMs, in other words, for many children, money does grow on trees (or rather in their parents’ pockets and purses).

According to one survey, nearly half a million children in the U.S. receive a regular allowance. Advocates of early financial “literacy” recommend that children as young as four years old can begin to understand how money works and are old enough to have an allowance. Allowances show children about the reality of spending, saving, and budgeting.

The first thing you have to decide is why you are giving your children an allowance. The purpose of giving allowances comes down to one simple lesson: to develop in your children a healthy relationship with money and to teach them how to use money responsibly.

Most experts agree that parents shouldn’t use allowances to reward desirable behaviors, such as getting As in school or winning in sports. Research shows that these external motivators actually undermine internal motivation; children miss the value of achievement as its own reward. Children can also become “reward junkies” who constantly demand greater rewards for their achievements.

There is also consensus that allowances shouldn’t be used to reward specific chores around the house. A problem that occurs in some families is that the parents can view their children as little employees rather than family members. As such, children should be paid for doing their “jobs.” Thus, children’s normal responsible behavior can become about earning the allowance rather than the intrinsic value of fulfilling their family responsibilities. The allowance should be an expression  of your appreciation (along with hugs, kisses, and thank yous) for your children’s commitment to your family.

You can add another layer of financial value to allowances by giving your children opportunities to supplement their allowances by doing chores above and beyond those expected of them as family members. These “overtime” opportunities provide the added value of introducing children to the exchange of goods and services for money and the very real-world concept of earning money, that is, if they want money, they need to work for it.

Allowances can also be useful tools for teaching your children about other positive values. For example, when you require them to deposit a certain amount of their allowance each month in an investment account, you teach them about frugality and long-term planning. When they set aside part of their allowance for their favorite charity, children learn about the value of compassion and giving.

A practical question to ask is how much allowance you should give your children. An allowance should be based less on your family’s financial situation and more on your children’s needs. Here are a few suggestions. Children can start to receive a weekly allowance as early as four years of age, as soon as they start to ask about money and want to buy things. You can start with a weekly allowance that is the equivalent of half their age (so $2 for a four year old). An increase of $1 per week for each year of your children’s lives is realistic until they reach their mid-teens. At this point, when they begin to drive and date, you can calculate their expenses and establish a reasonable allowance that covers their needs. Once they reach their teens, you may want to consider encouraging your children to get a summer job to supplement their allowances.

My wife and I bought our now-five-year-old daughter a piggy bank when she was four years old that has four compartments: Save, Spend, Invest, and Donate. We give her an allowance of $2 a week in quarters and she must deposit 50 cents into each compartment. When she wants to buy something, we use those opportunities as “teachable moments” to help her decide how important the item is to her, how much she will need to buy it, how long it will take to save for it, and how it might prevent her from buying something else that she wants.

In fact, we had one of those moments recently while shopping at Target. In the check-out line, our daughter saw a pinwheel for sale (I hate such product placement!) and asked if she could buy it. We told her that she could with her allowance. After learning that it would cost $1.09, I asked her if this was something on which she wanted to spend her money. After some internal deliberation, she chose not to buy the pinwheel. At dinner that evening, I asked her if she regretted her decision or was happy with her decision. She smiled and said that she was glad that she didn’t buy it. Lesson learned, ka-ching!

When you help your children to decide whether to wait to buy something later rather than right away, you show them about the value of patience and delayed gratification. An essential part of becoming a fiscally responsible person is learning to delay gratification (which is also associated with better grades, less drug use, delayed sexual activity, and fewer behavioral problems). Yet popular culture encourages—and profits from—children seeking immediate gratification. Fast-food, downloading music from home, and text messaging all enable people to get what they want ASAP. Teaching children to delay gratification through the use of allowances will make them more resistant to the messages of “Gotta have it now!” with which popular culture bombards them.

Another problem can occur when your children spend their allowances before the next “payday” and come to you asking for more to tide them over. If you give in to their often-times strident requests, they come to learn that the National Bank of  Daddy and Mommy is always open and “loan” terms are very friendly. Yet that is not how money in the real world works. It is incumbent on you to stay resolute in the face of their pleading, so you can ensure that your children learn the essential lesson of living within their means.

A final point. The most important financial lesson that children can learn is that money is earned, not a right or entitlement. This lesson is often difficult to teach to children, particularly in high-net-worth families because money does appear to grow on trees. Unless you plan to give your children a no-strings-attached trust fund and don’t expect them to be contributing members of society, the use of allowances can be a potent tool for teaching them financial responsibility and the value of money.



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