In these economic times it is not only crucial that we reevaluate the way we handle our finances, but also the way we teach our children to handle theirs.

This post is not written to reiterate popular modern methods of teaching children about money, but rather to help us move toward a proper system of training, regardless of what is currently popular.

Children learn from watching their parents behavior, not from listening to what their parents preach. Understanding that, the best way to train children on the proper use of finances is to use our own finances properly.

A Proper Approach to Allowance

I believe we are doing our children a disservice if we give allowance solely as a reward for doing chores.  Allowance should be given for use as a tool to train them on budgeting and how to handle their finances, not as a reward for completing household chores. Do you agree with this philosophy?  Before you answer that question… read on.

Most commonly, a family is an interdependent group of people living together in a love relationship.  Members of the family depend on each other and work together for the benefit of the unit as a whole.  They share most everything and do not benefit by keeping separate accounts of “yours and mine.”  Just as parents make dinner, wash dishes, clean the home, and offer transportation without expectation of allowance… children should be trained to contribute in much the same way.

By paying children for daily chores we are actually robbing them of their opportunity to contribute based on love, and instead teaching them that they should be paid for their contribution to the family.

So what about reward for excellent behavior?  Rewards should be given for going above and beyond the normal call of duty – thus earning a bonus – but not for performing everyday tasks.

A Proper Distribution

Since allowance is a tool used to train the child on the matter of proper money management… what about taxes?  I believe children should have taxes taken out of their allowance in order to paint them a more accurate portrait of how money is handled in “the real world.” Some may find this legalistic, but I’d rather they be as prepared for reality as possible.

Here is a solid outline for proper distribution of their allowance.  Take this and make it your own based on your situation.

• 15% giving – Based on gross amount… taken before taxes or anything else.
• 10% to taxes – Just as we have to pay taxes as an adult, we should give the child a similar opportunity… after all the idea is to train them.  Put this amount back into their college savings fund or some other savings account to be used for their future.  It may not seem like a lot, but remember… every penny counts!
• 25% to savings – What to save for?  This is a very personal matter to be determined by the parents.  If nothing else, simply save it to save it.
• 25% to bills – This is a very powerful concept, so keep an open mind here!  This money should go back to the parents and gives the children the unique opportunity to contribute to the household bills.  This builds confidence, self-worth, and an unmatchable feeling of usefulness.  This philosophy can also be used to teach them to conserve spending on household utilities, groceries, etc.  As much as possible, try to involve them in the bill paying/grocery shopping process… doing so will give them a “vested interest” in cutting costs.
• 25% to spending – This can be used as the child desires, but be careful here – proper use of this portion is critical in shaping their future spending habits.  If they want to spend it, they can spend it.  If they want to roll it into their savings, they can do that as well.  If they want to help out with bills, that too should be welcomed!  I think  you will be surprised by how much of it they simply want to give back to you in an effort to further “help out” with the costs of running the home!  Always make yourself available to help them make these decisions.

Give the children all their money up front, so they can see it and physically handle it.  Then help them divvy it up according to the distribution system you set up.  Also, include a statement of distribution so the child can see where all their money goes; just as your employer does with your paycheck.  Do not simply withhold a certain amount, because you want them to be as involved as possible.

What do you think?

Although we do not currently have children, we have interviewed several of our relatives on this matter, my wife also holds a masters degree in child psychology, and the concepts I’m about to lay out make perfect sense – although they will challenge you since they are not in-line with the popular way of doing things (which in my opinion is a good thing!)

For those of you that currently have children, what are some challenges I’ll face while trying to implement this system?  What system do you have in place?

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