Pocket money is a great tool for teaching kids the value of money. It is the foundation to understanding about money.
For many children, receiving pocket money is the first time they physically handle money on a regular basis. Pocket money can teach children about saving, spending, donating and investing. Children will learn to prioritise between wants and needs when they have to decide how to spend their money. They will also be exposed to delayed gratification in the money context when they save their money to buy their favourite toy from the shops. They will also learn how to spend money wisely when they make mistakes in buying things they thought needed but was in fact a fleeting moment of want.
Children will develop good money habits when they cultivate these money skills. Over time, these skills will help them make good money decisions in the future.
How do I do the pocket money thing?
If you decide to give pocket money, there are a few things you need to think about:
When should you start?
We can start giving children pocket money from the time they are 6 years old. This is not to say that money is taboo for children under the age of 6 years old. On the contrary, the earlier we expose children to money concepts, the easier it is to teach them more advanced money skills as they grow older. Before 6 years old, children’s exposure to money should be about curiosity and fun. They learn about what money looks like (eg. notes and coins), what to do with it (eg. it lets us buy stuff from the shops) and where to keep it (eg. piggy bank).
From 6 years old, children start to understand the concept of pocket money. Their curiosity about money is supplemented with learning about money as a valuable commodity.
How much should you give?
We don't want to give too much pocket money - after all, young children shouldn't have that many things they need to buy. But we want to give them too little because we want them to look forward to getting pocket money. So how much is enough?
A good formula to follow is to give the child $1 for each year of age: a 6-year old will receive $6; an 8-year old will receive $8; a 12-year old will receive $12. By the time the child is working age, you should consider reducing their pocket money to encourage them to get a part-time job.
Setting the amount based on the children's age will also avoid any unnecessary arguments over what is a 'fair' amount to give to children.
How often will you give?
It’s a good idea to start by giving pocket money once a week. Pick a day of the week where the family is not busy so that you can spend some time talking to your child. You could talk about why you're giving them pocket money and what they plan to do with it. Weekly pocket money works best for very young children.
For older children, the frequency can be increased to fortnightly or monthly. By increasing the time gap between each 'pay' you are teaching the children how to budget to make their money stretch before they receive their next pay. From 11 years old, children are able to exercise delayed gratification for what they want.
By the time your child gets a part time job, you should not be paying anymore pocket money.
What lessons do you want to tie to pocket money?
Every time there is an exchange of money, there is an opportunity to teach or reinforce a money lesson. So what do you want to teach your child when you hand over their pocket money?
- Do you want them to learn about saving money? Encourage your child to keep their money away safely in a piggy bank (or bank account or older children).
- Perhaps you want to teach them about saving and spending? Help your child decide how much pocket money they should set aside for saving and how much for spending.
- Philanthropy is a way to teach children that money can be used for a greater good. Decide as a family which charity you will support. Older children can decide if they want to support their own charity. Encourage your child to set aside some of their money to donate to charity.
- Do you want them to learn about saving, spending, donating and investing? Underlying the concept of investing is delayed gratification. Mid-teen years are the best years to start teaching children about investing. Help your child understand investing by talking to them about buying a share in the shops your family frequently visits. Online share investing games tailored to teenagers are a great way to spark their interest in investing in shares.
What rules will you have in relation to their use of that money?
Now that you have empowered your child with money, decide on the limits to their use of the money: what they are allowed and not allowed to spend their money on? It’s their choice, but you must approve. For example, they cannot spend all their money on lollies only.