Down Payment on Your Child's Future: The Importance of Allowance

Estimated read time: 5 minutes

As a parent, you want to give your child all the tools and knowledge they need to be successful in life. You help them learn to read and write, you teach them how to pump gas, you teach them how to feed themselves, and they learn everything in between from you, too, whether that's by direct instruction or just watching how you handle your business.

Oftentimes, though, managing money isn't one of the conversations parents have. It can be a tough thing to do, especially if you're struggling with finances yourself, but being open with them now (about the good and the bad parts of your money management) can help set them up for success down the road, according to a study from T. Rowe Price.

Invest in Their Financial Futures

You've got to make sure you talk to your children about money early and often. That T. Rowe Price study says parents who talk to their kids about finances at least once a week are "significantly more likely to have kids who say they are smart about money."

So how do you do that? Some of the common conversation starters are:

  • Back-to-school shopping on a budget
  • Calculating money saved by purchasing sale items
  • Going into a bank
  • Talking about the cost of college
  • Talking about why you didn't take a longer vacation
  • Letting them manage their own money

The survey says 53% of kids who don't manage their own money spend it as soon as it's in their hands. That's compared to 40% for kids who do manage it on their own. On top of that, letting them be in charge of their own small piece of the financial pie gives them more opportunity to come to you with questions that directly impact them instead of just hearing you talk about it. That kind of experience can pay huge dividends down the road.

The Lowdown on Allowance

They can't manage what they don't have, so an allowance is a great way to get your young ones a source of income for this hands-on experience. Now you've got to decide their pay rate and what exactly you're going to pay them for.

How much to give

Many experts recommend to match their age. For example, a 10-year-old would get $10 each week (just make sure it fits into your budget).

You could also work out what things you expect them to pay for and base the allowance off that.

What they're getting paid for

It may seem like a good idea at first, but experts recommend not tying regular chores to an allowance. Remember, this is all part of teaching them about how the world works. Not paying them for doing things like cleaning their room or loading the dishwasher teaches them how to be a contributing member of the family, according to a report.

An option is to offer a bonus for doing things that are above and beyond the daily expectations. Need the leaves in the yard raked up? Hire your live-in contract worker for the job. They'll learn how doing some hard work results in a nice bump in that bank account.

Bank of Mom and Dad

While a checking or savings account could be right for your kids depending on their age, for the most part you will be their bank. Your parents probably gave you cash, and it was up to you to store it, probably in a piggy bank or jar of some sort. That was then, this is now.

Digital allowance

How many people regularly carry cash these days? For a fun, easy way to get your kids in on the financial studies in a way that goes along with the increasingly digital world in which we live, there are services like RoosterMoney, FamZoo, and Threejars.

RoosterMoney seems to be the most convenient due to having a smartphone app. On that one you can create an account for each of your children, giving you and them a way to track all their money in and out. You can even set savings goals, giving them a way to watch as they get closer to having enough for that new video game or bike.

Some of these services will even let you set an interest rate to encourage saving. You set the rate, and they can watch that money grow just by hanging onto it instead of blowing it all on new toys.

There's also a way for them to get a taste of the bad side of finances. FamZoo lets your kids get a loan from you, giving them a snapshot of what it's like to buy on credit. Just make sure you hold them to the payments. Otherwise, the lesson could be lost.

Branching out

Once your kids start to get the hang of things, you may want to open them a savings or checking account at a real bank. Believe it or not, there are checking accounts geared towards children. Getting them into a bank branch can give them the feel of what it's like to actually go in, talk to a teller, and open the account. Think of it as stepping up from the minor league into the majors.

If you've got an older child, say high school age, you could take the step and set them as an authorized user to your credit card. That can give them a little bit more responsibility and help them build credit while you're still there to monitor it closely.

For the college kids, getting your first credit card on your own is a great step towards a strong financial footing. Cards like the Discover it Student Cash Back offer students the opportunity to build credit, learn good credit building habits, and earn cashback rewards.

This card also offers an incentive for good grades. You'll get a $20 statement credit each school year your GPA is 3.0 or higher for up to five years.

Start the Conversation Now

"We know that kids' money habits are formed before they get to high school and that their parents are often their most influential teachers," Roger Young, a senior financial planner at T. Rowe Price said.

He went on to say, "These parents are hit with the double consequences of their own financial mistakes and the prospect that their kids may be set up to relive them."

Setting the wheels in motion right now to make sure your kids understand the value of a dollar and know how to manage their finances can save you and them from learning a harder lesson down the line. Whether your personal finances are stellar or a work in progress, the time to start the conversation with your children is now.