How Can I Teach My Child About Money?

by Gary E. Dudley, Ph.D.

Common wisdom tells us that providing children with an allowance helps them to understand and develop an appreciation for the value of money. Through their use of their allowance money, it is thought, that they may be somehow prepared to manage the financial duties that life will eventually present. It is also a popular notion that this "allowance" should be connected to some duties or chores that the child performs, in order to justify the parental expenditure.

From a developmental perspective, I believe that both of these popular notions provide less than optimal motivation toward the development of the tools necessary to become financially responsible. In the first place, financial responsibility involves not only specific skill sets, but also a series of judgments and decisions around getting, keeping, and spending money. Simply providing a child with money does little to foster this process. The second issue, that chores should somehow be tied to the allowance, ignores what I believe it is an important realization that every child should make: that everyone in a family benefits from being a member of the family, and therefore should make a contribution that benefits the family, independent of getting money.

If you are a parent, I invite you to think of the last time you received income for preparing dinner or going to the supermarket, or maintaining the inventory of the pantry, or driving the children to soccer practice. Or, when is the last time you received income for maintaining the family car or keeping the toilets in working order? Children benefit from all of these things, and it is my belief that children should contribute something to the family to foster their understanding of reciprocity in important relationships.

I am not suggesting that we eliminate allowances. Children as young as five and six years old like to have some coins in their pocket, and do need to learn the values of a penny, nickel, dime, and quarter. They can also learn how to count their money and, by second or third grade, how to make change. Allowance money is useful, at least, for this. In the following paragraphs, I will describe a process which I believe helps to develop the skills and the judgment making ability that underlie what we think of as "financial responsibility."

Children differ widely in their ability to make judgments. Although formal logic arrives as one of the functions our brains allow us to perform by approximately age 12, refining the skill of logical judgment and decision-making requires years of practice. It is one of the most important developmental tasks during the period of adolescence to early adulthood. Depending on the child, age 12 may be a time to introduce him or her to some of the skills involved in money management. A hypothetical example follows.

Suppose we have a conversation with Johnny at about age 12 to let him know that we will be asking him to take over the responsibility for managing some of his own "accounts." We say to him, for example,

"You know, each year we spend (pick a number here, $1000, $1800 or whatever you like) in order to provide you with the clothing you need. We also provide you with money for school lunch, entertainment money for when you want to go skating or to the movies, and money to put in the collection plate at church, and money so that you can buy birthday and/or Christmas gifts for family members.

"So, we are going to help you learn how to take care of the money that goes into these things by giving you a monthly allowance of $200. We decided on this amount by reviewing what we have spent in the past year on the five things that we just mentioned which are called "expense accounts." Your job will be to manage this money and take over the responsibility of what clothing to buy, how much to spend for school lunches, entertainment, and the other things."

Parental involvement is obviously crucial to the success of such an endeavor, and engaging the children in regular conversations about the decisions they are making helps develop the skill and decision-making ability that we all must acquire to become financially independent from our families.

If, during the first month of budgeting, Johnny just has to have the $140 pair of designer shoes, he may find that he has no money left for lunch by the third week. He is then faced with the task of addressing his problem. It doesn't take him to long to realize that he will have to prepare his lunch at home and carry it to school. Or, if Marcia has to have that very expensive coat, she may find that purchasing some blouses or skirts or other necessary clothing has to wait an additional month or two.

Obviously this is not a process in which parents don't manage and interact. It would be risky to just let the children shift for themselves. The process lends itself to the opportunity to have the kinds of conversations that can promote and develop the ability to look ahead, become more planful, evaluate the results of past decisions, and in the process become better decision-makers, more mature in their judgment, and more skilled at budgeting and managing their money.

This is offered as just one approach to helping children develop an important life skill. I have found it useful over the years in working with children at times as young as 10 years. However, on average, a child is ready to enter into this kind of process by about age 12 years. It does require parental involvement and guidance, and it can be worse than useless if parents are not willing or able to make the time and emotional investment in the process.

It involves not only the financial decision making but also is a time to reinforce family values. For example, maybe your faith requires that a certain percentage of your income be donated to the church. Or, perhaps you want to stress the value of saving and encourage the child to put five or ten per cent of the money into a savings account. This affords the opportunity for an educational visit to the bank. Many children with whom I have worked, have become perfectly capable of operating and maintaining their own checking account by the age of 15 years. And I'm sure there are a lot of children out there who might develop their own software to rival Quicken and Peachtree Accounting if they really get an interest in tracking their money. And wouldn't it be nice to see our children at the computer engaged in something other than a mindless videogame?

This downloadable sample form may help you help the child see how his money is being managed and allow you to have a degree of oversight of your child's progress. By simply teaching him to record and add his income and record and subtract his expenses, he now has the basics for learning about money management and budgeting.