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Using an allowance to teach financial lessons
Did you know that most parents expect their kids to do some work in exchange for an allowance? In fact, 89 percent of parents want their children to spend at least an hour a week on chores, according to a survey conducted for the American Institute of CPAs.
On average, children spend about six hours a week on household duties. No matter what the rules are in their house, the Minnesota Society of CPAs advises parents that there are steps they can take to ensure that their kids are learning some financial lessons when they get their allowance.
Who’s giving allowances?
Allowance is a fact of life in most American households. The AICPA survey found that 61 percent of parents give their kids an allowance, with most beginning by the time their child is age 8. Although what they receive is frequently determined by their age, kids receive an average of $65 a month. In addition, about half of parents pay their children for good grades, with the bonus for an A averaging $16.60.
The survey also found that most children were allowed to use their allowance earnings as they chose, while their parents also paid for expenses related to a sport or hobby and for mobile phone service, movie rentals and digital downloads. About half anticipated financially supporting their children until they were age 22 or older.
It may be a better idea to set guidelines on how the allowance should be spent, or at least on what the parents will pay for beyond the allowance. Parents should explain why they are giving their children an allowance, whether there are ways to earn extra money in exchange for added chores, for example, and if there are situations in which their children may lose some or the entire weekly sum.
Talk about savings
Keep in mind that the allowance parents pay may not be helping their child learn to spend money wisely if he or she is using it for impulse purchases such as after-school snacks or toys rather than contributing toward hobbies or trips or saving it for wish-list purchases.
If parents have a child that is dreaming of an expensive indulgence, they should talk to him or her about the value of saving towards something. They should also consider opening a savings account with their child and encouraging weekly deposits from allowance or other earnings. The entries in a savings passbook can help demonstrate how money accumulates over time. Parents should help their children set goals — like purchasing a new game or going on an outing with friends at the end of the school year — and talk to them about how the money they’re putting aside in their savings account will help them achieve their goals.
Set an example
CPAs recommend using every opportunity to teach children about managing their own money. The AICPA survey found that parents were more likely to talk to their kids about good manners, good eating habits and the dangers of drugs, alcohol and smoking than they were to talk about finances.
Parents can contribute to their kids’ financial savvy by talking about their own financial choices and pointing out when they’re making a purchase with money they’ve saved or when they’ve lowered their expenses by shopping wisely. Setting a good example and taking the time to teach financial lessons can help encourage children to make prudent choices with their money now and in the future.
Consult Your CPA
If you want help making smart financial decisions for your family, remember that your local CPA can help. Don’t have a CPA? Visit www.mncpa.org/referral to find a CPA in your area.