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The Bank of Mum and Dad - Your Child and their weekly allowance

Friday, 13 November 2009

The first time that parents and children start talking about money together is when the topic of a weekly allowance rears its head.

Liam Croke: Money Expert

Liam has worked in the financial services industry for the past 21 years and seen by many as an expert in the field of personal finance. He is a qualified financial and mortgage advisor.

In the past he has held senior management positions with two well known financial institutions along with one of the "top 5" accountancy practices in Ireland.
Liam gives his advice and wisdom on a daily basis to those who are just starting out to high net worth individuals. He currently works for a financial services company based in Limerick.

He is frequently asked to contribute and comment in all areas relating to personal finance on both national and local radio stations. You will have heard him for example recently on RTE's "The Mooney Show" and on Newstalk's "The Right Hook."
Liam was invited to make a presentation to the Joint Oireachtas Committee on Social & Family Affairs on trends and levels of personal debt in Ireland. He made his presentation to the committee on the 24th June 2009.

Liam is author of 4 personal finance books:
. The best selling "The Mortgage Maze Explained" published by Currach Press in 2006.
The best selling book "Your Money Your Life - Managing your finances in today's Ireland" published in 2007.
"I'm Broke! A teenagers guide to Money" - Published by Crabtree and distributed in the UK & USA in 2009
"Stash or Splash" which is being released in Ireland and the UK in September of this year.

. Liam previously wrote a weekly personal finance column for The Sunday World entitled "Mr. Cash - How to Save it, Spend it, Earn it" and has also written articles for the Sunday Business Post, the Evening Echo, the Sunday Independent, the Irish Sun, Prudence Magazine to mention just a few.

Pocket Money

Intro: Today we look at the age old dilemma of how much pocket money we give our children and the reasons why?

Now it isn't just parents and kids who disagree about this issue. Many parents often are at logger heads with each other. How much to give? Do they only get an allowance in return for doing "chores" around the house and so on.

Let me tell you what my own definition of an allowance is and let's see if you agree with me or not? I believe it is a fixed amount of money children receive on a regular basis; with the understanding that from this amount of money received they will pay for certain agreed upon expenses.

I also believe and recognise that no single allowance system will work for every family. However, any system adopted by you will only work, in my opinion, if you follow two basic rules for success:

1. Don't start giving an allowance until your kids are old enough to manage it
2. Keep the system simple so that you can manage it

Some parents believe that by denying their children an allowance they will be able to limit the amount of money they can get their hands on, but research rubbishes this belief as studies have found that kids who don't get a weekly allowance have access to about as much money as kids who do. Children figure they will actually get more by "tapping" up Mum or Dad for cash whenever they head out rather than getting a fixed amount each week.

The benefit of giving an allowance each week is that amazing as it sounds it won't cost you anymore money than what you're already spending. In fact for most parents it ends up costing less!

Giving a weekly allowance you are simply giving your kids the money you are already spending on them along with the added responsibility to make those purchases and that is the key. So, if for example you find you are forking out €10 for call credit, €10 for snacks, €10 for magazines, €10 for CD's and so on then make it clear that you are going to give them a fixed amount of €40 per week and if they want to purchase any of these things they need to use their own money. If they run out of call credit well that is up to them to manage their allowance better and either spend more next week on it from their allowance or less on their other outgoings to compensate.

There was a "kids and money" survey carried out in 2005 in the states amongst parents of children aged between five and twelve years old. It found that all children will spend some of their money on games, toys and sweets, but girls are more likely than boys to spend on books, magazines and clothing.

It also found that 50.2% of children aged between 5 and 12 receive pocket money with 21% of children saving all of their allowance, 57% saving some of their allowance and 22% spending all of their allowance.

This subject matter is a bit of an obsession with me and has been for a couple of years because I firmly believe that teaching our kids how to manage money and helping them develop sound financial habits are opportunities few parents can afford to miss. The fact that kids are able to grasp money concepts much earlier through their own real life experiences than in the abstract world of school is just that much more of a reason to start teaching them at an early age.

I believe that an allowance is a good way to help children understand the importance of saving and wise spending. When I say wise spending I mean using their money carefully to buy things that they would like to have but can also afford. By saving I mean being able to afford things that would otherwise be unattainable.

When to Start?

The main signs of when your child is ready for an allowance are their emotional maturity, cognitive level and the ability of your child to begin assuming responsibility for each type of expenditure. This will vary from child to child. I believe that you should start young children with very limited responsibilities within each area and add more responsibilities as they get older. Typically, they are able to assume some responsibility for:

. Spending Age 3
. Saving Age 5
. Sharing Age 5
. Gifts Age 7
. Clothes Age 9

Don't take these ages as an absolute guide but more as an indication of when you may want to consider increasing their allowance.

How Much?

Some "financial experts" recommend giving €1 for each year of their age. Now I don't think that works as €5 per week is probably too much for a 5 year old and €15 each week not enough for a 15 year old. The amount that is right for your child will depend on 3 factors:

1. What you expect them to pay for. Does the allowance have to cover for example, school dinners, DVD's, CD's, magazines, phone credit and clothes?
2. The child's level of maturity
3. What you can afford. Not everyone can afford to pay their kids several Euros each week and this is often made worse if the family is large.

I would stress that the weekly allowance is not just solely for spending either! Part of this allowance should go towards two things, saving and giving. A general rule of thumb would be 10% of your allowance goes towards saving and 10% towards giving. This introduces the concept of saving and giving to others at an early stage that will last a lifetime.

Working for that allowance does not work!
Some parents mistakenly believe that using an allowance will get their children to do more around the house or work harder at school. An allowance turns into a bribe and it really doesn't matter how you look at it, because, over time, it just does not work.

What will happen is that your child may say "I don't need money this week so I am not doing anything around the house" or "I am not going to study hard because if I get an A well I will only get €50 in return, it's not worth the effort". You should expect as a parent that they will help out around the house because they are responsible family members and everyone helps out around the house. They do their homework and study because they realise how important doing well is to their future achievements in college or whatever career they want to pursue. Money should not be a factor!

At the same time do not hesitate to pay your children for extra jobs around the house. Most kid's jump at the opportunity to make more money so if you need the grass cut or car washed offer your kids the opportunity to do this for you and make some extra money for themselves.

Start observing their "money styles"

The Spendthrift
Now that your child has an allowance they may be captivated by using it to buy things. Spending their own money for the first time might give them a "rush" but what we don't want them to become is out of control.

You want them to develop a sense of self-discipline and self-confidence from their spending habits.

So, the next time you are going shopping before you leave, get them to make a list of things they want to buy. Let them shop putting things away in their basket then help them add up what they have spent. Compare this figure with the amount they have to spend and then let them decide what items they really want and what they don't.

By giving them control of money decisions, not just spending, you are giving them an early lesson in financial decision making.

Under no circumstances do you make up any difference from what they have and what they need to spend, this is just defeating the whole lesson and you are sending out the wrong signals.

The Hoarder
Sometimes this style develops because the child thinks that holding on to money will please Mum and Dad. Whilst saving is one of the skills you want your child to learn and one you want to teach, hoarding money is not.

Encourage them to spend some of their money, plan a special outing, a day trip or simply go bowling or to the cinema and get them to spend some of their money on themselves.

Emphasise that money has many different purposes and if managed properly you can get great uses from it. The sole purpose of money is not just for hoarding.

The Begger
Please! Please! Can I? Can I? - sound familiar? You are going to have to practise some tough love here and answers to this type of question from your child could be:

. "You are my little angel and I love buying you things and making you happy but "Can I? Can I? is not a good way of getting my attention. Why don't you tell me why this is so important to you and why you want it?
. Simply NO!
. "Remember how we spoke last week about saving your money? Well if you continue to save your money in only 2 weeks time you will have enough money to buy this. Isn't that great? Only two more weeks of saving and you can buy it all on your own, we will fill in your chart when we get home"

All of these responses are fine. The important thing to remember is not to give in to every request your child makes from you.

The Oblivious
If your child is not enjoying what subtle lessons you are trying to teach them and it is not fun then they will take no notice of you or of money. This may be because your own style and how you communicate about money is one of nervousness, anxiety, fear etc. then ask a friend or family member to speak with your child who may be able to communicate in a calmer, more engaging way about money skills than you can.

The Scrimper
This type of child does get real pleasure from coming home with change and you know it would be unwise to tamper with or change this type of behaviour. However, if they beginning to show signs of withholding or selfish behaviour with family or friends then it will be time to focus on the art of giving.

Additional / Misc' Info:
Research from 2008 by Bank of Ireland Life in association with online parent resource showed:

On average the surveyed parents give their children weekly pocket money of:
€9.69 for Primary school children,
€18.51 for Secondary School children
€60 for 3rd level students.

Hibernian Aviva research from 2007 revealed that
62% of parents give their children pocket money as they need it, rather than provide a set allowance each week
17% of parents give their children a set amount of pocket
15% say they don't give pocket money at all.
Primary school students receive on average €10 per week,
Secondary school children receiving €20 per week and
3rd Level children receiving €68 per week