Giving children solid grounding in money management is crucial. Budgeting, saving, frugality, and financial planning are important components of living on one's own and taking responsibility. It's unlikely that personal finance skills will be taught in school to any appreciable degree, so it's up to parents to do this.
We give our daughter an allowance. It's the same introduction to money management that I got when I was a child. It's what I know.
But, in order to this be a series of teachable moments, there needs to be structure and purpose. Here are five key features of how we're going about it:
- We break up the allowance into three broad categories. We also set the percentages for each category: 10% for tithe, 30% for savings, and 60% for spending. She has three jars that each part goes in — a starter version of the envelope method. Why this is key: We want to instill in her that not all of the money that comes into her hands is available for spending.
- We insist that our daughter puts the tithe portion in the collection plate. Our daughter also sees us do likewise; we're leading by example. This feature of her allowance was there from the start. Some might argue that insisting on a child tithing misses the point of the tithe, which is an act of worship to God. But, if we're providing the funds, it's not just that we should have a say in how she uses those funds. We are accountable to God for how she uses those funds. Eventually, the money coming into her pocket will be her earnings, and then she will be accountable to God for those funds. Why this is key: We as parents only have a small window of opportunity to exert a positive influence on our daughter, and part of that is instilling a biblical view of money and stewardship.
- We insist on discussion if she wants to dip into the savings portion. If we save, we should save for a purpose. Likewise, if we withdraw from savings, we had better count the cost of doing so, because that can be done only so many times. Why this is key: Adults have to be able to save, and understand why they need to save and how long it will take them to reach their goals. By putting 30% of her allowance in a separate jar each week, she sees how that grows with time, and can begin to figure on how long it will take to reach whatever goal she has in mind.
- We allow her to spend the rest as she likes (within reason). Today we went into a couple of stores. One was a confectionery and gift shop. My daughter has a love for stuffed animals, and saw a bear that she liked. She had her money with her. My wife initially said no to the bear, for the reason that she already has several stuffed bears. But — and I don't do this often, and not in front of our daughter — I took issue with that and discussed it with my wife. We eventually left the decision up to our daughter whether to buy it or not. Why this is key: There has to be the “opportunity” for our daughter to make mistakes. If she doesn't make a few now, then she'll make bigger ones later.
- As she gets older, we'll let her outgrow the allowance. Right now, her allowance isn't too bad. As she get older, if we plan things correctly, the allowance will begin to be constraining, and at that point she'll start investigating other ways to make money. Why this is key: Eventually the allowance goes away, and the burden falls on her. Best to make this transition earlier rather than later.
For those of you with “allowance experience,” what other features do you use? We'd love to hear them in the comments!