How to Do Allowances Right
One of the best ways to ensure your children grow up financially fit is to give them practice managing money with an allowance. But what’s the best way to do an allowance? There are different theories on what works best.
Ron Lieber, personal finance writer for The New York Times, says he and his wife pay their 7-year-old daughter three dollars a week, no chores necessary. Lieber’s daughter puts one dollar in a “save” jar and one dollar in a “give” jar for a cause of her choosing. She can spend the final dollar as she wants. Lieber’s reasoning is that an allowance is a teaching tool and making it contingent on chores muddies the issue. What if the children decide they don’t want money? Do they still have to do the chores?
Lewis Mandell, financial economist and professor emeritus at the State University of New York – Buffalo, however, says unconditional allowances are a “terrible idea,” citing a 2000 study that showed kids who received a regular allowance left high school knowing less about personal finances than kids who received no allowance – though the differences were slight.
According to an article by Investopedia.com, approximately 75% of parents give their kids a weekly allowance. Most of those parents are doing so to teach their kids the importance of working and earning money or to help them learn how to manage money.
So how should you handle an allowance with your own children?
Use It as a Teaching Tool
Regardless of how your children earn an allowance, use it as a tool to reinforce good money habits from an early age. Talk about finances early and often, and set a good example.
Consider Matching Their Savings
To encourage saving, tell your children for every dollar they set aside for long-term goals, you’ll match it in their youth savings account. Share statements with them so they can see their money grow.
Gradually Introduce Them to Financial Products
Deposit allowances into a youth savings account, and later a share draft checking account and help them manage their accounts wisely.
Research shows that kids who learn to manage money at an early age are better prepared to handle their finances when they leave home. And, ultimately, teaching children good money skills is a sound investment for parents, who are often the ones called on to help their adult children when they run into real-world money problems. If you’re interested in talking to an UNCLE representative about setting your child up with a youth savings account, visit any UNCLE Financial Center or call 800.34.UNCLE.