One of the nice things about using an allowance guided, at least initially, by a child’s age is that as your child gets older, he will get more money for which he has to be responsible. As you put more and more into his hands, you increase his level of responsibility and teach more complex ideas.
At age six, a young ’un only has to cope with a small amount of money and the simplest of wants. By age 12, more factors are driving your child’s desire to consume, and a steadily growing allowance lets you help her increase her understanding of ideas like needs versus wants.
When Alex was 12, I started giving her a clothing allowance. We agreed that the money I gave her would cover all her clothing except outerwear (I didn’t want her to skimp) and footwear (a pair of boots, a pair of running shoes, and two other pairs of shoes a year). She had to plan for everything else. When I told my friends I was giving my 12-year-old $50 a month for a clothing allowance, most of them freaked. That was an outrageous amount of money for a kid! What if she blew it on crap? Suppose she bought clothes I didn’t approve of? Other than the stuff I said I would buy, and birthday and Christmas presents, I never had to put my hand in my wallet again: not for swimsuits or semi-formal dresses. (I did buy her prom dress.) Alex learned to accumulate money for more expensive things, shop on sale so she’d have money for accessories, and take care of her stuff.
When Alex was about 15, she got her first clothing allowance raise. She had never asked, but I thought it was time. She was growing like a weed. I asked how much she thought she needed. She said $100 a month. I laughed. We settled on $70. By the time she was 16, she was The Best Shopper. She indulged herself, but knew her limits. And she definitely knew the difference between a want and a need. Kids grasp financial principles at different ages. Parents underestimate what their kids can understand, sometimes because they cannot even conceive of giving up any control. But if you want your kids to be responsible, you must treat them with respect and give them some room to try, fail, and try again. Assess the level your child is at and teach lessons that can be learned, because Junior is ready to learn. And be willing to let your kids experience the learning for themselves. Show them how and then let them experiment. Learning from the natural consequences of our decisions is the best learning.
Here are some things to think about at various ages.
Toddlers
Try to be aware of what kids may be learning from you, even as toddlers. Pick up a penny on the sidewalk and you show that even the smallest denomination is valuable. Throw your change into a drawer, into a jar, into a box without explanation, and you teach your kids that small change is worthless to you, not worth your time and energy to sort and bank. As you pull cash from an ATM, take the time to explain that you had to work for that money, that you put it in the bank to keep it safe and earn interest, and that you can only take out as much as you have available. It doesn’t matter that your child is a squirming three-year- old who is only interested in pushing the buttons. Talk to them about what you’re doing with your money and why. Over time, your explanations will penetrate their youthful haze and they’ll learn important lessons.
Four- to Six-Year-Olds
When your child is between the ages of four and six, introduce your young ’un to the basic concept that we use money to buy goods and services. Give your child the change to operate a vending machine or buy a newspaper. Explain that when you pay for something, the machine keeps the money, but you get the pop or newspaper (money is a means of exchange). You can progress from here to paying a cashier for small things like popsicles or candy. Ultimately, the message is that when you spend money, it’s gone (money is an exhaustible resource). You get something in return. But you don’t have the money anymore, so choose wisely.
Kids also need to learn that when you buy something, you’ll be dipping into a finite amount of money. Give your child $3 to buy something the next time you go to the grocery store, and tell her she can choose just one thing. (Don’t be surprised if your preschooler doesn’t yet understand that there are 100 cents in a dollar. Helping her with the prices will be a great math lesson too.) This will show your child that money can be used up, so she has to choose carefully to get what she really wants.
Since busy people often run into stores to buy things, it’s only natural for little Since busy people often run into stores to buy things, it’s only natural for little ones to think, “When we go in a store, we buy something”—in your child’s mind, anything at all. To counter this “store equals stuff” mentality, make a list before you go shopping, then show your child both your list and the money you have to pay for the items. Don’t forget to do it when you hit the toy store for birthday party gifts too. This will help him see that some shopping trips are not about him.
Seven- to 10-Year-Olds
When your child is between the ages of seven and 10, you can start focusing your “money lessons” on deferral of gratification. Most parents are all too aware of the “see it, want it, gotta have it now” attitude. Lots of parents are happy to demonstrate it for their kids, so it’s no wonder kids learn this lesson so well.
Even if you are a planner, in all likelihood you haven’t taken the time to explain this to your kids. So what they see is, “What Mommy wants, Mommy gets!”
Next time your child expresses an interest in buying a new doll or yet one more Lego kit, make a chart to help her see how long she has to save to get the money for the item. Find a picture that represents the item your child wishes to buy and paste it at the top of the chart. Draw boxes for the number of weeks she will have to save. So if the item costs $10 and she is setting aside $2 in her allowance for planned spending each week, you’ll draw five boxes. Staple an envelope to the chart. Then, each week when you give her allowance to her, she’ll put $2 into the envelope and mark off one of the boxes. This will show her that she can’t always have what she wants right away. Sometimes it takes time to accumulate the money we need to buy the things we want.
It’s important to teach kids to be discerning consumers. Ask your child to make a list of all the things he would buy if he had $100. Then ask him to choose the three items he considers most desirable and answer the following questions:
Tell him that sometimes it’s really easy to be attracted to an item because a
friend has it or because it looks great on TV, but you need to think about why you want it, and if it’ll do what you expect, before you buy it (more about this in the “Spending” section). Make trimming household expenses a family affair, and teach an important money lesson along the way. Assign your kids one or two responsibilities for meeting your household budget, things like turning off lights to save on electricity, or coming up with a list of grocery items for their lunches so they waste less food. Any money you save can go towards a family goal, such as a new computer or a vacation. This will show your kids that balancing today’s needs with tomorrow’s wants sometimes means you have to find ways to spend less money.
Eleven- to 14-Year-Olds
It’s time to explode the myth of the bottomless wallet. To some children, parents with regular salaries seem rich. It doesn’t matter if we say we have no money.
They don’t believe us. We have those credit cards. And then there are those cheques. To demonstrate just how little disposable income is left after expenses are met, ask your child to:
Now, go over the figures and fill in the gaps or correct the misperceptions. I remember the first time I pointed to a load of firewood (we had a wood-burning furnace at the time) and asked Alex what she thought I’d paid for the wood. She assessed the pile and then said, “$137.” (I smile even now at the not-round number she came up with.) I laughed and said, “Higher.” She guessed again. “Higher.” Her eyes widened and she finally said, “I don’t want to do this anymore.”
“That pile of wood,” I said, pointing to a mountain that still had to be stacked, “will heat our house for half the winter and cost $750.” She was aghast. How could she possibly know if we didn’t have the conversation? The same holds true for what you pay for hydro, to cover your property taxes, for your mortgage, to insure your car.
Wherever possible, show your child a bill to make the cost concrete. Total up the expenses. (You’ll also have to introduce the costs you pay less regularly, like insurance, dental bills, and holidays.) Deduct it from your net income. Decide together what to do with what’s really left for entertainment—take in a movie or hit McDonald’s for lunch. (For very concrete or hands-on learners, consider using stacks of Monopoly money to show your children how the cash flows out, and just how quickly.)
Many parents are hugely resistant to telling their children how much they make and where the money goes. Some say that money is a private matter. So private that you can’t talk to your own children about it? Or is your unwillingness to do this because your own financial foundation is crumbling? What better motivation is there to fix your mess than to be able to launch your kids with a firm foundation of their own?
Some parents say they don’t want to rob their kids of their innocence. Don’t think you’re preserving their innocence by not teaching them about money. What you’re preserving is their ignorance. And, perhaps, your power. Innocence isn’t the issue. Since there’s nothing inherently bad, dirty, or evil about money, innocence shouldn’t come into the equation. How are kids to understand why you can’t order pizza every night if they don’t understand how that would blow the budget?
To give your child some experience living within the parameters of your family budget, assign her dinner responsibilities one night of the week, along with one- seventh of the dinner budget. Perhaps your food budget allows for $20 per family dinner. Perhaps less. Whatever the amount, she’ll have to come up with a plan, look at what’s already in the cupboard and the fridge, and then come with you to the market to choose the items for dinner that night. She must plan a balanced and delicious meal. Dessert would be nice too.
Choose an activity your child likes to do, such as piano, baseball, or renting movies. Put the amount of money, divided by 52, into your child’s regular allowance and explain that he must set that amount aside each week for his music lessons, Little League fees, or video rentals. Tell him there are lots of things we have to plan for before we can pay for them, and that means setting aside a little money each week to cover the costs. You can use labelled jars or envelopes to store the planned spending money.
This is also the stage at which most kids can deal with the more abstract idea of a debit card. Now that they are consuming more on their own (without you), a debit card means they won’t have to walk around with a wad of cash in their wallets. If you’ve started your children on a clothing allowance or they are now wallets. If you’ve started your children on a clothing allowance or they are now responsible for their own back-to-school shopping, using a debit card may not only be more convenient but may offer the opportunity to teach important lessons about tracking their spending.
Fifteen and Older
By the time your child is in grade 10, he is likely old enough for lessons on long- term savings and investing. Savings options like RRSPs and TFSAs can help teach kids the difference between short-term (I’m spending this money imminently) accumulation, which I like to call “planned spending,” and long- term (I’m not going to touch this money no matter what) savings.
Another lucrative lesson children can learn from tax-deferred savings plans is the one about compounding return. Find a savings calculator on the Internet and take your child through the exercise of saving a specific amount of money over the long term. You might, for example, use saving just $100 a month at 5% for 20, 30, and 40 years to show that more time means hugely different amounts accumulated. Then change the rate of return from 5% to 7% to show how increasing your rate of return grows your money even faster. Unlike saving, taxes aren’t intuitive, so you have to explain why they’re necessary, how they’re calculated, and how much less you have to live on after they are paid. There are sites online that will calculate both average and marginal tax rates; find one and show your almost-adult how $35,000, $50,000, and $75,000 in income means less money in the bank than you might think once income taxes have been deducted.
Whether your kids are shovelling snow, walking dogs, or babysitting, as long as they get a social insurance number, keep their financial information straight, and file a tax return to qualify their earned income, they can begin to contribute to an RRSP. Since they don’t have much in the way of taxable income, they can hold their deductions for later years when they are paying more tax and could use a break. Still pay your bills by cheque? Let your kids write them out. Pay bills online? Show them how it’s done and let them pay some bills. Developing a comfort level with the things adults do as a matter of course means they won’t panic when they have to do it for themselves. The first couple of times Alex had to enter her PIN for a debit purchase, she was in a twist. What if she entered it wrong? What if it didn’t work? What if the purchase was denied because she was over her limit? All those anxieties opened doors to very good conversations, and the practice means she doesn’t have to think twice now that she’s on her and the practice means she doesn’t have to think twice now that she’s on her own at school.
If you’re considering one of those prepaid credit cards that are becoming popular, don’t. Prepaid credit cards are preloaded with money your kid can spend, and they are permission to go shopping. They are more like gift cards than like credit cards—they never need repayment, and dontcha just want to teach kids that! Teaching kids about credit is an important part of rounding out their financial educations, so that’s what we’ll talk about next.