Teaching children about money management is a big job for parents, and there are many ways to go about it. Money talk often starts by paying an allowance. According to new research from the American Institute of CPAs (AICPA), two-thirds of parents (66%) give their child an allowance at an average of $30 a week. An allowance is just part of a larger conversation about effective financial management. Parents must make sure the lessons sink in. The good news is that nearly half of parents (49%) say they take time to teach their child about money at least once a week. However, nearly a third (32%) say they only teach their children about money no more than once a month, including the 7% who admit they never teach their kids about money.
Margaret Poster, CPA, an AICPA National CPA Financial Literacy Commission member, spoke to AICPA Insights about the importance of starting financial lessons at home and shared the following insight for parents.
Why is it important for parents to have the money conversation?
Margaret Poster: Parents are already focused on teaching good habits to their children — brushing their teeth, eating healthy food and being kind and helpful to others. Managing money is one more habit where starting early helps children better understand the value of money and how to manage it. It gives them a longer lead time to ensure that these habits become ingrained before their children begin making independent financial decisions that have greater consequences. A strong foundation of financial knowledge will benefit a child their entire life.
According to the survey, only 3% of parents say their child primarily saves their allowance. What steps can parents take to encourage their children to be better savers?
MP: When children want bigger purchases, such as a skateboard that costs $100, you can help your child come up with a plan for how they’re going to save up to buy it and how long it will take. If, for example, their allowance is $30 and $10 of that amount is for discretionary items, they can save that $10 toward the purchase of that skateboard. It will take them 10 weeks to have the $100 they need to buy it. That may seem like a long time, but you can do things along the way to keep track of their progress, such as creating a chart and marking off how much has been accumulated to date. As they make progress toward the goal, you can discuss which one to purchase, and understand the pros and cons of different models. As they get closer, you can talk about where they’ll use it, who they’ll use it with, etc. In other words, focus on different aspects of owning the skateboard to take some of the focus away from just the money. This will build understanding of the value of the purchase and why they want to have it. It will also build excitement as they get closer to the goal.
What advice do you have for parents who are undecided about giving an allowance?
MP: There are many perspectives on an allowance: when to start, how much it should be and what purchases the allowance money should cover. There’s no right or wrong answer to this; but, in general, an allowance increases with age, ability to take responsibility and may include more categories of expenses over time.
But teaching children about money is not limited to a conversation about allowance. There are other opportunities that can be turned into teachable moments. Before buying groceries, create a budget with your child. You can talk about the staple items the family needs to have for healthy eating and, where possible, you can give children choices about items for their school lunch. Then, with any money that may be left over, you can allow them to choose a treat. The more they help you save — the more money they have to spend on a reward. Similarly, for older children, you can set a clothing budget and help them select and manage their purchases. This is a great way to demonstrate the trade-offs that come with good money management.
For those parents who pay an allowance, how would you advise they set it up to help their children understand the value of money?
MP: By the time children are 5 or 6, they understand the concept of a pie and dividing it into portions. This is a useful tool to help them learn how to allocate spending between instant gratification and longer-term purchases that require savings. For older children, you can explain how much of their allowance they need to save to reach their goal. More savings will get them there faster, so they have a tradeoff to make.
Overall, giving children some say in how money is spent gives them valuable experience and builds their confidence and ability to make smart decisions.
The more you engage your child in financial discussions, the more likely they are to learn. For insight on how to talk to your kids about money, check out the AICPA’s 360 Degrees of Financial Literacy website at 360FinLit.com. There, you will find an assortment of free videos and articles about the basics of budgeting, as well as a collection of calculators to help show and track financial progress.