The Benefits of Giving Allowance to Children: Teaching Financial Literacy

Teaching children financial literacy is an essential aspect of their overall development. One effective method is to give them an allowance. In this article, we'll explore the benefits of this practice, drawing on personal experiences and research to provide a comprehensive understanding of its impact on financial education and life skills.

Introduction to Allowance

Allowance is a system where children receive a set amount of money, usually on a regular basis, to manage themselves. The children are expected to use this money to purchase items, manage savings, and even handle expenses for extracurricular activities. This system helps them learn valuable lessons about earning, spending, saving, and managing money.

The Benefits of Allowance

1. Learning the Value of Earnings

When children have a say in what they earn and how they manage it, they begin to understand the value of work and the importance of earning their own money. For example, when my children were around 13, they started delivering newspapers. They quickly learned that money has to be earned through hard work and that time is a valuable resource that can be bartered for money. This early experience helped them appreciate the value of labor and the concept of earning a wage.

2. The Concept of Saving and Spending

Allowance provides a practical way for children to learn about saving and spending. One of my daughters saved her earnings to purchase a two-bedroom apartment when she was just 23. While my other daughter took much longer to save, this system helped her develop both patience and a sense of delayed gratification. These lessons are crucial for building financial resilience and responsible spending habits.

3. Teaching Responsibility and Planning

By managing their allowance, children learn to be responsible and make smart financial decisions. For instance, when I had to forgo lollies and ice cream in favor of going on a school trip to Tasmania in the 1970s, it taught me the value of planning and prioritizing. This experience reinforced the idea that money is a limited resource and should be used wisely. Such lessons are valuable in the long run, as they contribute to better financial management in adulthood.

Personal Experiences and Evidence

Exhibit A includes my four siblings as case studies. My elder sister and brother were given an allowance as children, which they managed effectively. As adults, all three of us own our own homes and other properties, and my brother is a multi-millionaire. We all have had the same partner for many years, and I have been in a committed relationship for 35 years with three kids and four grandchildren. This success can be partially attributed to the financial literacy we developed through managing our allowance.

Exhibit B contrasts with Exhibit A, showing the experiences of my two younger sisters who were not given an allowance. Both have faced financial challenges and are divorced. My youngest sister has never owned a house and struggles financially. My other sister has virtually nothing and also faces financial difficulties. While neither case definitively proves a cause-and-effect relationship, it highlights the potential long-term impact of financial education during childhood.

Research also supports the idea that early financial education can have a positive impact. A study by the JumpStart Coalition for Personal Financial Literacy found that children who received allowances and were taught how to manage them were better prepared to handle real-life financial challenges in adulthood. These lessons help them make informed decisions and avoid common pitfalls such as debt and poor money management.

Conclusion

While the benefits of giving children an allowance may not be immediately apparent, the long-term financial literacy and responsibility skills acquired are invaluable. Through hands-on experiences with money, children develop a deep understanding of its value and the importance of smart financial habits. Parents and guardians play a crucial role in shaping their children's financial future by instilling these essential lessons early on.

Call to Action

Considering these benefits, it is recommended that parents and guardians start giving their children an allowance as early as possible. By providing them with the tools to manage their finances, we can help prepare them for a successful and responsible adulthood.