Want to raise money-smart kids? Start by using an allowance as more than an act of bribery for good behavior. Allowances are not just great incentives for your kids. Approached properly, they can be an important tool for their financial education.
Money-smart kids are more likely to be financially savvy adults. However, for this to happen, there are a few things to keep in mind.
Make them earn it.
An allowance should be a reward for extra effort and performance beyond the call of duty. There are certain things, such as keeping their rooms clean or looking out for younger siblings, that should be done as part of being a supportive family member, without expectation of financial reward. Provide an allowance only for the extras, such as doing the grocery shopping or washing the family car—things that save you time, money, or both. An allowance for not missing school makes no sense. An allowance for tutoring younger siblings, in addition to staying on top of their own school work, is more like it.
Make them spend their money—not yours.
If you’re going to give them an allowance, require them to make decisions about how to spend it. This means you need to limit your spending to the necessities—meals, clothing, shelter, etc.—and require them to pay for extras such as snacks or video games using their allowance. You’ll be pleasantly surprised at how responsible they’ll be with money when they are spending theirs, not yours.
If they want to make a major purchase, resist the urge to buy it for them. Instead, require them to save toward it from their allowance each week. This way, they’ll learn delayed gratification and financial discipline—two important keys to managing money and building wealth.
Require them to budget for more than just spending.
It’s important that your kids learn how to budget their allowance to purchase the things they want. However, it may be even more important to teach that there’s more to getting an allowance than just spending it.
First, require them to set aside a portion, perhaps 10%, for savings. They can use a piggy bank, or better, open a uniform transfer to minors account for them at a local bank. Agree to deposit an amount equal to the amount they’ve saved at the end of the year.
Another 5% to 10% or more can go to charity, such as tithing at your church or a cause they care about. Of course, it helps if you teach by your own example.
Teach by example.
When it comes to teaching your kids about money, transparency is a powerful tool. Be open about setting financial goals and priorities for your household. There’s no better way to help your kids develop a comfort level with saving and investing for long-term goals. Your kids desperately need the reality check of reviewing household bills with you each month in order to understand the true value of money and that cable TV, water, electricity, food, and shelter are not free.
Instead of treating the term “budget” as a dirty word, encourage your kids to develop spending plans for their money and stick to them. Find ways to reward such behaviors, for example, by agreeing to match, dollar for dollar, savings toward an agreed upon long-term goal such as college tuition. Most of all, set the example by creating and honoring your own budget.
Raising money-smart kids is a great long-term investment.
When my oldest daughter was a pre-teen, she asked me to buy her a pair of Air Jordans. I told her that her mother and I would pay for half if she paid for the rest. Suddenly, she was just fine with an ordinary pair of new athletic shoes (on sale, about 15% of the cost of those Jordans). She made the purchase without our help and (far more important to her) without wiping out her savings.
Today, my oldest daughter, multimedia entertainer and producer Mo Brown, is a financially capable and responsible adult (as are her siblings). She graduated from Long Island University in Brooklyn, New York, with a great credit score and has since launched and successfully managed several small businesses, as well as her personal finances and career. Money-smart kids become self-reliant adults free to pursue their goals and dreams. There are few greater sources of pride—and peace of mind—for a parent.
Black Enterprise Executive Editor-At-Large Alfred Edmond Jr. is an award-winning business and financial journalist, media executive, entrepreneurship expert, personal growth/relationship education coach, and co-founder of Grown Zone, a multimedia initiative focused on personal growth and healthy decision-making. This blog is dedicated to his thoughts about money, entrepreneurship, leadership and mentorship. Follow him on Twitter at @AlfredEdmondJr.