Don’t miss an opportunity to help your kids learn basic money management skills.
Getting an allowance is a time-honored tradition in our culture. According to a study by the American Institute of CPAs (AICPA), 9 out of 10 adults polled say they received an allowance when they were kids – and most of us had to work for that money.
The study also finds that kids today are the same. Almost seven in ten parents (68%) give their children an allowance that the kids must do some kind of work, such as chores around the house, to earn.
“In fact, these children are spending an average of approximately six hours a week on chores to earn their allowance. The average hourly rate of “pay” comes out to $4.43 an hour, which is a nice sixteen percent raise from the $3.82 they were making in 2012.”
What the experts at AICPA believe most parents miss is the opportunity to use allowance to teach children key financial lessons that will help them later in life. Allowance should be used to teach basic – and even more advanced – principles in money management so children have a better financial knowledge base heading into adulthood.
“One of the ways that parents can use allowance as a teaching tool is to encourage their children to save ten percent on a weekly basis and match the savings if they do. This simple, effective tool will better prepare them to contribute to a 401(k) account and take advantage of any matching offered by their employer,” added Gregory Anton, CPA and chair of AICPA’s National Financial Literacy Commission.
The report even goes on to say that parents can use that savings to help older children set up an IRA, so that they can begin building their retirement savings even before they graduate high school. And of course, more basic lessons like budgeting should still apply too.
“The first and most basic lesson children can be taught with an allowance is how to allocate portions of their income for various needs and wants,” explains April Lewis-Parks, Education Director for Consolidated Credit. “For example, if you pay your children a decent allowance, have them allocate part of that money to chip in on their mobile plan bill each month. Then part of the money gets moved into savings and the rest is left over to pay for movies with friends or whatever they want to buy.”
By using an allowance to teach children how to save up for major purchases and how to save effectively for the future while budgeting for today, kids are more likely to carry these lessons into adulthood to become financially successful once they’re out on their own.
For information on how to teach kids to budget, read Consolidated Credit’s Budgets are Cool self-help booklet. We also have a booklet for Talking Money with Your Kids to help you start the conversation.