Last Updated on July 2, 2023 by Parentology
Pocket Money: A Comprehensive Guide to Teaching Kids Financial Responsibility and Money Management
Introducing pocket money to children can be a vital step in instilling essential money management skills. These skills are influenced by factors such as the amount, timing, and overall decision to provide pocket money, which are unique to each family’s circumstances and values. Even at the tender age of 4 or 5, children can start building a foundational understanding of money management by receiving pocket money. It presents them with opportunities to choose between spending and saving, thereby nurturing their understanding of patience and the concept of delayed gratification.
Pocket money also serves as a practical lesson for children to comprehend the implications of financial loss. By allowing children to occasionally make financial missteps, like spending their savings on low-value items, we enable them to learn valuable lessons from these experiences. It’s also sensible to set certain boundaries on pocket money spending, such as discouraging purchases of excessive candy that could potentially harm their nutritious diet or dental health.
When Is The Right Time?
Determining the appropriate time to begin giving pocket money to children varies and doesn’t follow strict guidelines.
You can gauge if your child is ready to handle pocket money if they grasp the following concepts:
- The understanding that money is necessary to make purchases at stores.
- The importance of saving money rather than spending it all at once.
- The comprehension that once they exhaust their money, there won’t be any more until the next payment.
Once your child demonstrates an understanding of these concepts, it may indicate their readiness to engage in managing some pocket money.
How Much To Give?
The amount of pocket money to give largely depends on your individual circumstances and what you deem reasonable. Once your child comprehends the designated amount and frequency of their pocket money, they can begin learning how to utilize it wisely.
Consider the following factors when deciding on the amount of pocket money:
- The household chores you expect your child to undertake.
- Your family’s budgetary constraints and allowances.
- Your child’s age – for instance, you might give a five-year-old $5 per week and a seven-year-old $7 per week.
- The intended expenses to be covered by pocket money – if it is expected to include costs such as transportation, lunches, and savings, a slightly higher amount may be necessary.
Pocket money can be allocated for various purposes, including:
- Saving for a special game or toy.
- Funding special outings like trips to the movies.
- Purchasing gifts for siblings and extended family members.
- Providing funds for school recess activities.
Encouraging your child to manage their own pocket money is an excellent way for them to cultivate responsibility and independence.
Concepts To Instill Money Management
The topic of paying children for household chores is a multifaceted issue, and there is no one-size-fits-all approach that applies to every family.
Some families believe that everyone should contribute to chores simply because they are part of the family unit. Additionally, connecting children’s chores to pocket money may give rise to negotiations regarding the value of each chore.
Conversely, other families believe that pocket money should be earned rather than given freely. Offering pocket money as an incentive can motivate children to engage in household tasks.
If you opt to associate pocket money with chores, it is advisable to establish a consistent routine for the assigned tasks. For example, making the bed daily or weekly, taking out the trash each day, feeding the family pet daily, or washing the car on a weekly basis. This helps instill in your child the habit of working to earn money.
Another option to consider is decoupling chores from pocket money but providing additional compensation for extra chores.
If you choose to remunerate for chores with pocket money, it is important to clearly explain the expectations and requirements of each chore to avoid any confusion or negotiation regarding what needs to be done and when.
Here are some helpful tips regarding giving pocket money:
- Clearly communicate the purpose and limitations of pocket money to your child. Discuss what expenses it should cover, such as entertainment or food, and establish acceptable options within those categories. Creating a written list can provide clarity and serve as a reference.
- Collaboratively establish guidelines for dividing the pocket money into saving, spending, and donating. Engage in negotiations with your child to determine the allocation percentages. For instance, you might agree on 50% into savings, 40% for spending, and 10% for charitable contributions.
- Set an amount that aligns with your financial capabilities, regardless of what other parents or even your child may suggest. It’s important to consider your family’s circumstances and make decisions accordingly.
- Consistently adhere to a predetermined payment schedule. Choose a specific day to provide pocket money, whether it be weekly, fortnightly, or monthly. This regularity helps your child develop a sense of financial responsibility.
- Utilize separate jars or containers to assist your child in categorizing their money. For example, designate one jar for immediate spending on small items they desire and another for saving towards more significant purchases.
- Encourage your child to deposit saved money into a dedicated money box. As the amount accumulates, it reinforces the achievement of being a prudent saver.
- Resist the temptation to supplement or advance pocket money. The objective is to teach your child the importance of living within their means and not exceeding their income.
Opportunities To Impart Money Management Basics
When it comes to learning about money, your child absorbs a wealth of knowledge simply by observing how you handle your own finances. Whether it’s spending, saving, or donating, each financial action provides valuable opportunities to impart the basics of money management to your child.
As your child grows older, you can guide them in understanding key concepts related to money, including:
- Grasping the value of money: Teaching them about the relative prices of different items and helping them recognize the varying worth of things they desire to purchase.
- Embracing the concept of spending: Encouraging them to accept that once money is spent, it cannot be retrieved, emphasizing the importance of thoughtful decision-making when it comes to financial choices.
- Appreciating the significance of earning: Instilling the understanding that earning money typically requires hard work and effort, emphasizing the value of work as the primary means of acquiring income.
- Cultivating the habit of saving: Guiding them in setting both short-term and long-term saving goals, nurturing their understanding of delayed gratification and the satisfaction that comes with achieving their financial objectives.
- Introducing the concept of investing: Teaching them that investing money provides an opportunity to potentially earn more over time, while also discussing the associated risks and rewards of different investment options.
- Fostering a responsible approach to borrowing: Helping them comprehend the importance of repaying borrowed money and the potential consequences of accumulating debt, promoting responsible borrowing habits.
- Grasping the notion of opportunity cost: Encouraging them to recognize that using money to purchase one item means forgoing the opportunity to buy something else with the same amount of money, promoting thoughtful consideration of alternatives and informed decision-making.
By exposing your child to these lessons, you empower them with a solid foundation in money management, enabling them to make informed financial choices as they navigate their future.
In light of understanding the importance of financial literacy from an early age, it’s never too soon or too late to plan for your family’s financial future. Whether it’s creating a viable budget, saving for your children’s education, planning for retirement, or just needing advice on how to introduce pocket money, our dedicated financial advisors are here to help.
We are committed to understanding your unique circumstances and tailoring a financial plan that fits your family’s needs and goals.
Simply fill in the contact form below to get in touch with one of our expert financial advisors and let us guide you on your journey to financial success.