The Power of Allowances

November 5, 2020
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Financial Literacy For Children

Financial literacy and intelligence is something most of us learned or are currently learning now as adults. Imagine what good it would have done us if the things we know today we knew them 10 years ago or best of all when we were teenagers or even younger. Do you think you can help your kids and dependents to learn some of these things? I am sure everyone would count being able to ‘raise financially responsible children’ among their greatest achievements. My wife & I are currently using allowances to teach financial literacy. Let me share my family’s experience with the ‘Allowances’.

We decided to give all 3 children allowances; the amount varied according to their ages. The allowance comes once a month. They are free to use the cash as they wish, to buy anything they are inclined to or interested in. There are no restrictions; we allow them to be in charge of buying goodies like candy, ice cream, popcorn, etc.  We only buy those things for them on rarely.

What has been our experience? Initially, the children were wasteful, buying everything that captured their interest. After a while though, after they understood that money has a fixed elasticity; that there is no bottomless pit where money is mined, that if their pocket money gets exhausted, they will have to wait till next month to flex, then they became more frugal. Sometimes, they are even miserly. Some people cannot spend their money to buy snacks in Chicken Republic o. Who meat-pie help? You need to see the vehemence the idea of snacking is resisted when they learn they will pay for it. But it used to be a delight when mummy or daddy paid for it.

The money they have is also a tool for discipline, to ensure compliance with their assigned chores. If it’s not done, the person gets some fast deductions or payment to the other person who does it for the individual. Our shouting to get things done, to pull someone off the TV or Phone or Laptop or some play has reduced. Just let them know it would cost them 100 bucks for another person to do it and you will see the speed of compliance. Some have lost, at great misery, a whole month’s allowance for blatant disobedience and flagrant behavior. The lesson usually sticks better when money is involved, we have discovered.

In addition to teaching them to be responsible, know the value of money, and learn to save, we are also teaching them delayed gratification & investment skills by encouraging them to invest their savings. Every month my wife and I hold our MPC meeting where we set the rate for the month based on what we wish to achieve. If we are broke or cannot pay them what is due, we set the rate high so that they would reinvest everything they have got; thus we mop up their cash. If we want them to spend their cash, perhaps if they have enough to make a planned purchase, then we reduce the rate ridiculously, making the investment unattractive to the children. I currently offer them 25% interest if they invest with me for one month. If it goes on at this high rate, I go soon end up for my village. (This investment scheme will soon render me bankrupt). But the Children learn to save & invest which is great.

The allowance is a great tool. You want to try it today?

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