It is common knowledge that pocket money is an important tool to help children form positive financial habits. Small changes as children can mean the difference between a life of financial stability and years of money struggles. Frustratingly, children are not taught these necessary financial skills at school which makes them rely on their (often busy) parents to instill the right lessons and habits. All parents will choose to approach pocket money a little differently, but I’ve laid out 5 helpful tips to get you thinking about how you can teach your children good financial habits through pocket money.
1. Start as young as possible
According to a 2013 study by Cambridge University, we begin to form money habits from as young as 7. Getting your child into the habit of setting aside money each time they’re paid, and organising it into ‘save’, ‘spend’, and ‘give’, will teach them budgeting habits they’ll carry through to adulthood. Start by helping your child set a specific savings goal (for a game, toy, etc.) so that they can practice separating their money. This will also show them that they can even afford more expensive items if they practice diligence and patience instead of the ‘I want it now’ attitude.
2. Choose the system that works for you
Children need to understand the value of money, but every family is unique in what they can offer their children, so it is important to choose a system that works for you. There are three basic systems that parents can choose from to help educate their children on the value of money.
- A reward system: Particularly useful for younger children, a reward system allows children to help out with household tasks in exchange for money. This teaches children that to earn money you need to put in a bit of effort. Money does not come to those who wait but rather to those who go out and get it.
- An allowance system: This is ideal for parents who find it easier to schedule frequent payments to their children instead of monitoring the completion of tasks in exchange for money. Sit down with your child and discuss what you think they need to buy (e.g. toiletries, clothes and movie tickets) and what they don’t need to buy (e.g. school books, haircuts and stationery) with the money they receive. This will also help children understand how much things cost and how much money mom and dad usually spend on them.
- An income system: An income system works best for older children who can seek external sources of pocket money. This might include tutoring, babysitting, dog walking or working part-time during the holidays or on weekends.
3. Consistency is key
A crucial point to habit formation is consistency. Giving your child their allowance on ‘payday’ , and making ‘payday’ the same day each week or month, will help them understand the concept of making their money last. If they blow all their money in the first few days, they will realise that it is a long time between paydays and they need to be more conservative to avoid being in between paydays with no money to do fun things with friends.
4. Ignore what other kids are getting
The reason why pocket money can be such a confusing topic for so many parents is that there are so many variables. The amount of money you choose to give depends on what you can afford, the age of your child and what you expect them to do with their pocket money. Don’t break the bank trying to give your children pocket money or trying to match what their friends are getting. Being realistic about what you can afford will actually give them a better sense of ‘the real world’. Not everyone earns the same salary, but it’s what you do with it that counts.
5. Ensure they understand the basics
- Place an emphasis on basic math. Many believe that to have good money skills, you need to be a mathematical genius, however this is not true. Just focusing on basic numeracy (addition, subtraction, multiplication, and division) will help you improve your everyday financial decisions. It’s simple, good number sense = good money sense.
- Ensure your child understands the difference between chores and doing household tasks for money. The one is your responsibility for contributing to the family, while the other allows you to receive a reward for going over and above what is expected of you.
- The difference between assets and liabilities. Help your child understand that an asset is something that puts money into your bank account (i.e. makes you extra money), while a liability actually takes money out of your bank account. Both are things you own, but one gains value while the other loses value.