Why Give Allowance?

You would not have decided to read this blog unless you are thinking about giving your kids an allowance. Maybe you’ve already tried and it’s not quite working that way that you’d like. Maybe you keep forgetting to give them the allowance? Have you required your kids to finish a list of chores to get their allowance? Do the kids still ask you to pay for things and you find yourself giving in?

Most likely you’ve been focused on the act of giving your kids their allowance but have not done your homework. You need to step back and think about the bigger goal. Yes, giving them allowance will stop some of the whining from your kids to buy them things, but you are really shooting for a bigger goal:

You want to build a foundation of knowledge about money matters that will help your children manage their finances more effectively for the rest of their lives.

It sounds like an impossible goal for a simple allowance program, but if you break down what allowance does for your children you will see that an allowance helps to build the important life skill of money management.

Here are six life skills that allowance will teach them:

1. By giving allowance, you are preparing your child for having an adult income.

When your child becomes an adult, he or she will get a job and have an income. He will have to learn how to budget his paycheck to pay for what he needs and to save for his wants.

2. By giving allowance, you are giving your child the control to make choices.

By not giving allowance to your child, you are taking away the chance for them to make a money mistake and learn from it. Why should you make all the spending choices for your child? If you decide they can buy the doll but not the computer game – they don’t have the chance to learn about trade offs (if I buy the doll then I can’t buy the game) plus there is no vested interest for your child. And you wonder why they toss the new toys to the side and want something else?

3. By giving allowance, you are teaching them to “pay themselves first.”

When you are an adult, you spend part of your paycheck and you save some of it too. Most of us tend to “save what is left over after we pay the bills”. However here is your chance to teach the most important personal finance concept – PAY YOURSELF FIRST. (By the way, you should be doing this for yourself too.) By giving them allowance, they will learn to take part of their allowance and save it.

4. By giving allowance, you are showing them the power of compounding interest.

Once they learn to save part of their allowance, you can branch out to investing. Don’t worry, I’m not talking about you becoming a market guru. Once again they will learn another important financial concept – the power of compounding interest. You will take them to the bank to open up a saving account and they will watch their money grow and compound.

5. By giving allowance, you are explaining the advantages and dangers of credit.

When your child becomes an adult, they will have to use credit at some point in their life. Now is the time for them to learn early about the advantages and dangers of borrowing money.

6. By giving allowance, you are showing them compassion by learning how to share with charitable causes.

We live in a world full of charitable causes. By giving allowance, you will show your child how to set aside some of their allowance to share. You can help your child learn to research and give to causes that they believe in.

REMINDER...YOUR GOAL: Teach the Life Skill of Money Management

You want to build a foundation of knowledge about money matters that will help your children manage their finances more effectively for the rest of their lives.