Learning to Manage Money Through an Allowance
This time of year raises financial and educational questions for many families when it comes to giving children an allowance.
The dilemma often involves weighing the benefits of giving an allowance: Will the child gain educational value from it, or will the money simply be used to buy unnecessary things? Will they know how to manage the money? And how can we, as parents, help them learn to spend their money wisely?
Giving an allowance requires thought and an ongoing dialogue with your child. It involves setting family rules about what the money may and may not be spent on, creating a weekly routine for giving the allowance, and allowing the child a degree of independence in making decisions.
At Paamonim, we recommend giving children a regular allowance so they can gain age-appropriate experience in managing money and making decisions. The benefits children can gain are significant, and this time of year is an excellent opportunity to rethink the issue of allowance and consider the advantages it offers.
10 Things Your Children Will Learn If You Give Them an Allowance Regularly
Independence: Having a small amount of money at their disposal, to use as they see fit, within the boundaries set in advance by their parents, of course, gives children a sense of independence, control and maturity. On the one hand, you may hear statements such as, “It’s my money and I can do whatever I want with it,” and you will need to respond according to the boundaries you have set. On the other hand, independence comes with responsibility, and these feelings can also have a positive effect on children’s behavior in many other areas – both at home and at school.
The value of money: When children ask their parents for money to buy a sweet or a toy and receive it immediately, they do not truly understand the value of the money they were given. Children who receive an allowance begin to develop a new understanding of its value. They learn to think twice before spending it and to consider factors such as the price of the item they want to buy in relation to the amount of allowance they received.
Budget management: Money that has been spent disappears from the child’s wallet or money box and can no longer be used to buy other things. An allowance provides a direct, hands-on way to learn the concept of a budget and its limitations. Naturally, an allowance encourages children to think about their priorities and understand the principle of managing money within a limited budget.
Learning basic financial and consumer concepts: Children learn how much things cost, what is considered cheap or expensive, what makes a purchase worthwhile, and whether a more expensive product might actually offer better value, for example, because it contains a larger quantity or will last longer. They also practice basic arithmetic skills such as addition, subtraction, multiplication and division.
Delayed gratification and priorities: In the first few weeks, children will likely spend their allowance on the very day they receive it and buy the first thing they see. Gradually, and with your guidance, they will begin to understand that delaying immediate gratification can help them save more money and eventually buy a more expensive and more worthwhile product or experience.
The importance of saving for the future: When children receive an allowance, you can guide them to set aside part of the money they receive. The portion of the allowance directed toward savings gradually accumulates and becomes a meaningful amount that allows them to fulfill bigger dreams. The experience of saving is a valuable tool for your children’s learning and for shaping their future financial habits, planning ahead, saving for future goals and relying only on money they actually have.
Financial planning – discounts and special offers: Once children understand that they have money of their own and can spend it as they choose, they begin looking for ways to maximize their purchasing power and get greater value for their money. This is your opportunity to teach them how and where to find worthwhile discounts and special offers, read the fine print and compare different deals.
Repaying debts: In every family where children receive an allowance, requests for a loan are a familiar phenomenon. Children run out of money before their next allowance is due, or they want to buy something more expensive during a limited-time opportunity and ask you for a loan against their future allowance. As a rule, children should not be given their allowance ahead of schedule, so they can learn to use the money they received wisely and save toward future goals. However, there may be cases in which a child wants to buy something significant and there is a specific reason to make the purchase at a particular time, such as a birthday. If you decide to allow such a loan, you have a wonderful opportunity to teach your children a very important principle: borrowed money must be repaid.
Price comparison: With your guidance, your children will learn to check the price of the product they want in several stores. This will allow them to buy it at the lowest and best-value price available to them. Price comparison is an important skill that will serve them in every area of life.
Setting money aside for a rainy day: Children who have learned to save part of their allowance will be better able to get out of unpleasant situations than children who do not have such means available. For example, they may need to buy a bus ticket or even pay for a taxi if they are stuck at a friend’s house far away and you are unable to help them get home. Even a one-time experience like this can teach them an important and unforgettable lesson about the value of saving for a rainy day.
An allowance provides fertile ground for financial education and for building healthy foundations for your children’s future financial behavior. Read here how much it is recommended to give at each age and how to do it right.
