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What Age Does Financial Literacy Start?

Does your family call it “giving an allowance” or “paying an allowance”? How you answer that question can reveal a lot about a family and its values surrounding money and work.

Promoting Financial Literacy

Andolyn*, a mother of four children between 7 years and 16 months in Mobile, Ala., sees allowance as an opportunity to teach her children money-management skills. That’s the most often cited reason for giving a child an allowance: to teach financial literacy. Unfortunately, there is little data out there to show that this theory actually works.

In fact, Lewis Mandell, professor of finance and managerial economics at the State University of New York at Buffalo, did a national survey of 12th grade American students and found that those who received a regular allowance did worse than those who didn’t at skills involving financial literacy.

Ann Douglas, co-author of Family Finance: The Essential Guide for Parents (Dearborn Trade Publishing, 2001), looks at allowance as one of many ways to teach financial literacy. Among her other suggestions are setting a good example, explaining real-world issues and teaching age-appropriate lessons. And, she says, “Don’t be afraid to let your child learn a few money-management lessons through the School of Hard Knocks.” As for allowance itself, Douglas thinks an annual review of both level and responsibilities is important.

As a Reward Tool

Many families use allowance as a management tool for household chores. “Allowance can be useful in the context of a behavior management plan,” says Tara E. McKee, Ph.D., a developmental psychologist at Hamilton College in Clinton, N.Y., who sees allowance as a positive and negative reinforcement for desired behaviors.

By paying children to do work around the house, the logic goes, they learn the importance of their work and the gratification of being paid. Some families add to a basic amount of allowance if chores are done or pay per activity.

Another common role of allowance can be as matching funds for money saved from earnings outside the home. Andrew*, 15, of Alexandria, Va., receives money to match his earnings from a job helping an elderly neighbor bring her trash to the curb every week.

Many families decrease allowance as their children start to earn more. A parent of two teenagers, Jo*, only hands her children enough to cover their school lunches now that they both have after-school jobs. She advises parents to make sure there is a sense of earning it. “Don’t just give them money,” she says.

No Strings Attached

Other parents separate responsibilities from allowance. Susan*, of Warrenton, Va., whose three children receive an additional $.50 each year in their allowance, says, “Part of being in our family is helping around the house, and part of being in our family is receiving an allowance.”

Rachel*, a mother in Massachusetts, thinks allowance as payment for chores could backfire. “It didn’t make sense to sort of make it optional – today if you don’t care about your allowance then you don’t have to take out the trash,” she says.

Dave Royle, the Canadian author of My Allowance, advises a two-step approach to allowance. Up until the age of 10, he feels allowance should be an entitlement, just as doing simple chores should be expected. Around the time they enter the sixth grade, he says, allowance can be tied to chores and should be set at $1 per grade level.

Managing Spending

What a child is expected to do with their “own” money also varies between families. Many families enforce a savings plan for some percentage of the allowance – just as the family budget sets aside savings for retirement or long-term goals.

Many parents increase the allowance as a child matures, and at the same time add to the categories of things a child is expected to pay for. For example, a high school student might begin paying for school clothes out of his or her allowance as they take on the responsibility of driving and shopping on their own.

Going Without Allowance

There are also families for whom allowance is never instituted. Karen*, a mother in Virginia with four teen and adult daughters who has never paid allowances, says, “The policy in our house is don’t spend it. If you need it, ask, and you’ll get it if it’s not ridiculous.”

In addition, sometimes the family budget does not allow for giving extra spending money.

A Family Tradition

Families often use allowance to teach the values they learned from their own parents. In this way, continuity between generations adds to the importance of the custom.

One attorney and financial expert with two young children says her family is following family tradition in their approach. Allowance, in her opinion, is “a good idea” and is tied to age and some chores around the house.

Doris*, a grandmother in Alexandria, Va., whose two sons have long since left the nest, recently reflected on her experience and feels now that allowance is about more than what the child can get with the cash in their hands. She feels allowance also teaches that “they can’t always have what they want.”

The debate over allowance is not likely to stop soon and is one most parents feel strongly about one way or another. It’s simply up to you to decide what makes sense and works best for your family.

Learning the value of money

One of the many joys of being a parent is having a front-row seat for the growth and development of another human being. There is an inborn excitement in watching your progeny learn to make their first smile, take their first steps. As they grow older, you revel in their mastery of the alphabet and beam proudly as they read to you.

Some of their discoveries, although necessary, are not quite as enchanting to watch. For example, when one of my daughters discovered the finger painting capabilities and limitations of the contents in her diaper. (Note: It is easier to repaint the walls than clean them.) Or when my oldest child got her first love note at school, only to be disappointed when it was not from the object of her affection. (Note: mocha chip ice cream can cure a broken heart at the age of 8.) And take the universal one that all children simply must find out for themselves: That you really can get your fingers caught when you play slam the doors with your siblings. (Note: Keep a second carton of Mocha chip on hand for medicinal purposes such as swelling and tear-induced hunger.)

Another not so enchanting area of finance is credit and loans. You should pay particular attention to this area to ensure none of your children fall foul of money-lenders or even worse go into debt.

Cash loans can be borrowed from the bank or online websites. If you are in need of cash in emergency situations, banks can lend you the cash. Cash loans, however, can be derived from a number of sources including: –

  • Charge through credit card
  • Home equity loans
  • Home equity line of credit
  • Signature of unsecured loans

Credit unions are also a great place to find cash loans at the time of emergency. They are more willing to work with you more than you know. Emergency loan lenders can come from a variety of places see here.

If you don’t have an emergency fund built up, these might be necessary. You can also find emergency cash from a number of friends or your own family too.

Cash loans are mostly required when you are going through hardships. If you have no credit and require an emergency cash loan, then chances are that cash online might not be the wisest option.

Emergency alternatives include an emergency fund. Start to build one, if you already don’t have one.

Consider your assets. This is a much better option to cover costs during emergencies. Title loans are also another kind of high cost loan. You should go through all typrs and make sure your child is financially aware of credit, so that they can then avoid it.

Best lesson as a parent

Yet beyond all of these, I got to view one of the greatest spectator sports of parenting this past weekend. I was on the 50-yard line of life when my children finally learned the value of a dollar. (And as far as entertainment value goes, these seats were worth more than any being hawked for the Super Bowl or a Hilary Duff concert.)

Each daughter received a $25 Target gift card in their stockings this past Christmas. As we surveyed Mount Excess, erected by Santa and his helpers (aka: the grandparents), we figured the last thing these children needed was to run out to the store and buy more, so the gift cards quietly disappeared to a secured area in my bedroom.

Not secure enough.

The youngest came to the kitchen Friday night clutching them and grandly announcing that “I found these in your bra drawer, and it is time to go spend this stuff.” Fine, as we had no plans for Saturday, and fine – descriptive of their behavior of late – bra drawer pilfering notwithstanding.

Now it’s not as if my children have never held money of their own. A dollar here, two dollars there, but this was mega-bucks for them. They knew their purchasing power extended far beyond a bag of M&M;’s or a Teen Beat magazine. We listened to them banter in the backseat, tales of buying a television set, 10 video games, the entire toy department. They entered Target with a swagger of confidence and delusions of their actual power dancing like sugar plums in their brains.

First stop was the video game department. What!? A game costs $39.99!? We suggested that maybe they could pool their resources. The stare we received was comparable to the one cemented to Saddam’s face throughout his interrogation.

We quickly made our way to the toy department. I should have packed a lunch. We wore a rut in each aisle as we went up and down, up and down. What do you mean I don’t have enough for Angel Barbie? They actually think this stupid stuffed animal is worth $15? If I get the Ice Cream Maker, I don’t even have enough to buy a pack of gum! And my personal favorite: This isn’t fair!

We finally sojourned to the clothing department. I should have packed some earplugs. My middle daughter, Miss Fashionista, exclaimed for all to hear, “$18.99 for one lousy pair of Capri pants!? Give me a break!” She quickly made her way to the clearance racks.

As we left Target 90 minutes later, they each had a bag of goodies to show for their efforts. And while they don’t realize it, those same efforts had also afforded them a huge life lesson. (And a great afternoon of entertainment for their parents!)

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