Let the children make money mistakes
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Let the children make money mistakes
An allowance can help teach your kids the value of money
Five-year-old Riley waits patiently with her dad at the cash register until the moment she spots the
chocolaty surprise. “Dad, look! A Kinder Surprise! Can I have it?”
“I take her grocery shopping every time I go, because it's a good life lesson. But now she's just
coming to an age where she wants her things, her candies, her toys. And I'm at the point where I'm
going to give her an allowance,” says her dad, Kris Ward, who lives in Hamilton.
“I haven't started yet but I'm right at the cusp. She can count and she understands the idea of
money. I'm just trying to figure out the right approach,” says Ward.
So far he's heard about three different strategies.
There's the pay-once-per-week-regardless strategy. “Seems like the standard approach that many
of us grew up with. ‘Here's five bucks a week. Blow it on whatever you like.'”
Then there's a new school of thought with a “hard-lined” approach. “You take all the money you
would have spent on your kid — food, clothes, entertainment, whatever — and just give it to them.
You let them make mistakes and that's it.”
Ward says the method seems too extreme for his taste. “If you give your kids a whack of money,
they'll blow it all on marshmallows,” Ward comments. “And then what — they go to school in their
pyjamas?”
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Let the children make money mistakes
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The last method is reward-based. “I do like that idea of a pay-as-you-clean allowance. ‘If you can
put away the Strawberry Shortcake toy that has 17,000 pieces, then here's your allowance.' It
seems like a sensible approach to me, but it might result in me having to keep a cash register load
of money around,” says Ward.
While he hasn't settled on a strategy, Ward knows what he hopes to instill in his daughter: “I want
Riley to learn that money isn't limitless. There is a finite amount. You can earn more, but once it's
gone, it's gone.”
Teaching kids the value of money can be a daunting task. According to a study funded by the
Canadian Institute for Chartered Accountants, 78 per cent of parents who have tried don't feel
particularly successful. Yet, almost all parents agree teaching children how to manage money is
critical.
Robin Taub, chartered accountant and author of the book A Parent's Guide to Raising MoneySmart Kids, says using an allowance as a training tool can be an effective way for kids to learn.
“It gives them an opportunity to manage money, to handle money and to make decisions about
whether they want to save it, spend it, donate it or invest it for the long run,” she says.
Before handing the money over, the family should be clear about what the allowance is for. “Then
they have to communicate it clearly to their children, so the kids know why they're getting an
allowance and what their responsibilities are for receiving it.”
As Ward is finding out, there are number of strategies to choose from. The Financial Consumer
Agency of Canada (FCAC) suggests choosing an approach that works for your personal situation. It
also suggests deciding on a fixed amount first.
Then the question becomes, how much? FCAC advises choosing an amount you can afford that's
age-appropriate.
It could be $1 dollar per age. So, a 7-year-old would receive $7 per week. Too much? Halve the
amount to pay $3.50 per week. Some parents pay by grade. If you have a one child in Grade two
and one Grade five, you'd pay them $2 and $5 respectively.
Encourage young children to save some of their money in a piggy bank before they spend it. Taub
says an effective way to get kids to save more is to link their savings to their personal values.
“As a kid, you're going to have things that are really important to you, even if it's just a video game
or toy that you really want. Connecting your savings to that particular value makes it that much
more meaningful,” says Taub.
This may be tough with younger kids, when they don't understand delayed gratification.
“But they're not too young to experience it,” she says.
Another way to encourage children to save more is by offering to match their savings.
Let's say your child wants something that costs $16, you could offer to pay $8 if she saves $8.
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Let the children make money mistakes
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“It's not a lot different than what you'll encounter later on in life,” Taub says. “Financial incentives
really motivate people.”
Once they get older, give them more freedom, more responsibility and also more accountability for
how the money is spent, suggests Taub.
Preteens, for example, could use their allowance to cover the cost of entertainment, transportation
or clothing.
This will give them a sense of what's involved in making money last throughout the week.
If they spend their money before the week's out, resist the urge to come to the rescue. “There's a
lot more at stake financially when they get older and the consequences can be pretty severe. Let
them make mistakes and let them run out of money,” she says.
Easier said than done, says Ward.
“You know girls and their dads. We're absolute suckers. That's the girl we love most in the entire
world and it's very difficult to say no to the love of your life,” he says. “But I would certainly
endeavour to do right by her.”
The money lessons
Investor Education Fund, a non-profit by the Ontario Securities Commission, champions financial
literacy for children. Here are their tips for raising money-smart kids.
Walk the talk: Your own parents probably had a major impact on how you perceive money
today. Just like you learned from them, your child watches and learns from your behaviours. If
you're a good financial role model — you save, pay down debt, shop on budget — you child may
follow suit.
Let them experience: Involving your children in the family finances can be a great way for
them to see how you manage the household money. Often times, we learn best by doing. Help
them learn the basics about budgeting and bank accounts. Go one step further and have them
build their own budgets. Consider opening a bank account together. And with a little guidance, let
them manage their own funds.
Consider your approach: You child's ability to grasp certain financial concepts will largely
depend on their age. Here are some concepts to teach as they grow up:
Preschool: Talk about coins, their colour, names and work up your child's counting skills. TVO
offers an online game called Coin Spot. Sesame Street offers a financial video series called Save,
Spend, Share.
Elementary school: Teach them about needs versus wants, how to save for a goal and how to
plan purchases. Test their math skills with PBS Kid's Mad Money Game.
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Junior high: Now they understand the basics, teach them about investing, earning interest and
paying through credit. Show them how money is made through the Royal Canadian Mint's
website, Kid's Corner.
Go beyond allowance: If you see your child is taking your lessons to heart, give them incentive
to continue. Reward them for demonstrating good money habits with a special privilege, a family
outing or extra praise.
Teach the way they learn: Children absorb information in a variety of ways.
Whether it's by seeing or by handling, choose a method that will resonate with them.
Find the teachable moments: We are surrounded by life lessons. Eating out or simple trip to
the grocery store can teach kids about money if you involve them in the process. Compare prices
and determine an item's worth.
Keep it simple: Keep your lessons focused. To help them retain the information, you could use
memory aids like acronyms, lists or golden rules. As they get older, help them keep their spending
in check by following the rules you've set out.
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