Pocket money: Does it have a place in children financial literacy?

Pocket money (called an ‘allowance’ in some parts of the world) is a gold mine for the finance industry. Apparently it is worth $1.4 billion a year. A long time ago, public schools in Australia were in fact involved in teaching children about money. Teachers were the bankers for a Government bank and the school banking initiative was supported by the Government. Today, there is no Government bank – all banks in Australia are now privatised. School banking is now optional and teachers are no longer involved in teaching children about money. Children financial literacy is now in the realms of parenting.

To give or not to give

Today, giving pocket money is highly controversial. It has remained popular with many parents, but equally as many parents have moved away from the belief that pocket money is the best way to improve children’s financial literacy. Everyone have reasons for giving or not giving. The video clip below are typical comments given by parents when asked about pocket money.

So should you do it?? I think so.

In this post, I explain why giving children pocket money is a good idea. I address many of the concerns about pocket money and explain why the conventional way of giving pocket money is problematic. In another post I explain the correct way of giving pocket money and give you an insight into my pocket money system.

1. Reading, writing, arithmetic … and financial literacy?

Financial literacy is a fundamental skill. Just like reading, writing and arithmetic, the earlier a child is exposed to financial literacy, the better. The way a child learns to read, write and do arithmetic often follows a structured program. Reading begins with teaching a child the alphabet. Writing begins with tracing dotted lines. Arithmetic begins by counting numbers 0 to 10. Where do we start when teaching children financial literacy?

Reading begins with teaching a child the alphabet. Writing begins with tracing dotted lines. Arithmetic begins by counting numbers 0 to 10. Where do we start when teaching children financial literacy? 

Up until the age of 6 years old, children’s exposure to money is all about having fun:

  • counting coins
  • building up towers with coins then knocking them down
  • having coin-spinning and coin-rolling contests
  • recognising the different forms of money (notes and coins)
  • recognising the different denominations (10 cents, one dollar, ten dollars, etc).

At this early stage in life, financial literacy it is about exposing young children to the idea that there is something called money. It is also exposing them to the look and feel of money.

From the age of 7, children start forming money habits – this is when we need to start teaching children a bit more about the concept of money. By this age, children already know, at a tangible level, what money looks like. They already have an idea that there are different amounts of money. They now need to move beyond being exposed  to money to learning about the power of money. I believe pocket money is the stepping stone towards teaching these complex money lessons.

Below I address the common objections that parents have about giving children pocket money.

Objection #1: young children don’t need money

… young children don’t need money. Everything a young child needs in life is provided by the parents.

Young children have many things they want, but they don’t have many things that they need. Some parents are against the idea of giving young children money because quite simply young children don’t need money. Everything a young child needs in life is provided by the parents. Anything else a child wants is for the parents to decide whether the child can have it. Young children should not be given the freedom to buy whatever they want with money that are simply given to them.

I agree.

We shouldn’t use pocket money to empower young children with the freedom to shop. No one else on this planet is going to give us free money to fulfil our shopping desire, so too with pocket money. It should not be given freely. Children’s needs are very simple. It is the parent’s responsibility to provide for the everything a child needs. If there are things child want, it is a parent’s prerogative to decide whether to give that thing. Little people, little expense.

I give my children pocket money. As you will read later, I do not give my children pocket money the conventional way. The reason I give my children pocket money is because I see pocket money as a stepping stone to fundamental lessons about money. That is, it is a tool in learning about money. I do not allow the children’s pocket money to empower their freedom to spend. Instead, I allow it to empower their decision to budget. I still get to decide their requests for items they want – after all, they still need someone to take them to the shops!

Young children do not need money, but they need to learn the power of money.

Objection #2: It will send out wrong signals

It is very common for parents to tie giving pocket money with completing housework, getting good grades at school, doing their homework or even just good behaviour. If not done properly, such linkage can send the wrong signals to kids that they deserve payment for every good deed that they do. At the extreme, it implies that a child should do good things only if they get an external reward. This takes away an opportunity for the child to experience the intrinsic joy of helping others and reduces the child’s development of empathy and natural generosity.

At the extreme, it implies that a child should do good things only if they get an external reward.

I agree.

We have to put in some thought into giving pocket money before we jump into the giving bandwagon. It is much more complex than simply deciding how much, when and how often (although none of these decisions are simple). Giving pocket money, if not done properly and if not done after much thought, can cause a lot of angst and frustration for both parent and child. I have gone through many these frustrations with my own children and had to go back the drawing board many times to refine my method. I now have one that works very well for my family.

Whether we like it or not, money is an important aspect of life. I believe children should be taught the power of money – this is not a bad thing. The power of money itself is not a bad thing – money can be used for both good and evil. Children who are taught the power of money should learn about how that power ought to be used. Whether a child sees money as a catalyst for getting things done or for good behaviour depends on the conversations we have with them when we give them money.

Objection #3: There are other ways of teaching financial literacy 

Any circumstance involving the exchange of money is an opportunity to develop a child’s financial literacy. It is therefore not necessary to give a young child pocket money. They can learn about money in other ways that don’t involve pocket money.

They can learn about money in other ways that don’t involve pocket money. 

I agree.

With the possible negative effects of giving pocket money and the availability of other ways to teach children financial literacy, it is understandable why parents might shy away from the whole idea of pocket money in the first place. Financial literacy isn’t just about giving and receiving pocket money. This is why we have to put in a lot of thought into the concept of pocket money. Giving and receiving pocket money is simply another situation involving the exchange of money and is simply another opportunity to have conversations with the children about money.

What I really like about giving pocket money to young children is that this is an opportunity that I know will present itself very frequently (starting with weekly). Just like any other fundamental skills, kids must cultivate and practise financial literacy often. Giving pocket money on a weekly basis creates that opportunity to practise talking about money.

Another aspect I like about giving my children pocket money is that it is a situation that I can manufacture and control:

  • I can set the rules and boundaries of the situation;
  • I can make it easy or difficult;
  • It allows me to e creative;
  • I can modify it

and best of all, I have instant feedback on what is working and what is not working on a weekly basis!

Top 5 reasons why I give my children pocket money

Telling a child he or she shouldn’t eat too many chocolates is one thing. It is another to convince a child why he or she should eat more fruits and vegetables instead. The same thing here – overcoming common objections to giving pocket money is one thing. It is another to give positive reasons in favour of giving pocket money.

'TEACH' financial literacy
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… overcoming common objections to giving pocket money is one thing. It is another to give positive reasons in favour of giving pocket money.

Here are another 5 reasons why I give my children pocket money:

  1. It is an opportunity for me to teach more complex money lessons – such as saving, earning, budgeting, donating, spending.
  2. It teaches moral lessons – if you need money, there are many ways of earning it. You don’t need to steal or cheat to get money.
  3. It teaches delayed gratification – if you want to buy something, you firstly have to earn the money AND THEN save up for the item. That’s a long time to wait for a young child! But trust me, your child will eventually enjoy this journey.
  4. It teaches the value of money – if you have to earn the money, you will value the effort that you have to put into working.
  5. It clarifies my thinking about money – if I want my children to learn some money skills, I need to think about why I am giving them pocket money in the first place. What lessons am I teaching them by giving them pocket money?

2. Giving pocket money the conventional way is flawed

After overcoming the hurdle of deciding whether to give pocket money, many parents will then go through what I went through when I first gave my children pocket money. I decided on an arbitrary amount to give. I then went through the weekly ritual of handing over the money to my kids. Sometimes this might be accompanied by words of wisdom such as:

  • Don’t go spending all of it;
  • Spend it wisely;
  • Don’t spend it all on junk;
  • Save some for a rainy day.

We’re now a family that gives out pocket money. Parental duty done. What’s next on the list?

If this sounds familiar, I’m afraid I have bad news for you. This is NOT the way to give pocket money. I learnt this the hard way. The problem with this approach is that we have simply thrown money at the children and hope they learn to be sensible with it. But we haven’t defined exactly what is ‘sensible’. What may appear sensible to the child may be irresponsible by adult standards. Similarly, what is sensible in the adult world may appear nonsensical for the child.

Unless we have a conversation with our children about pocket money, there will not be a common understanding. This is the underlying cause of a lot of angst amongst parent and child. We have not set boundaries for the money. We have not taught our children why we’re giving them the money. Maybe it’s because we’re not clear on why we’re giving them pocket money. Simply handing over an arbitrary amount of money whilst espousing some words of wisdom will do nothing to increase the child’s financial literacy.

In my next post, I write about the correct way of giving pocket money.

3. The verdict

By now, you will have worked out that I am in the ‘giving’ camp. I believe this is an important step in teaching our children about money. However, there is a right way and a wrong way of giving pocket money. In this post, I write about the correct way of giving pocket money.

4. The secret …

Whether you are in the giving camp or not giving camp, the secret is to be clear on why you’re doing the pocket money thing. Not having a clear reason for why we do what we do with money is one of the most common mistakes parents make when teaching their children about money. Find out what other common mistakes parents make in Top 5 mistakes parents make when teaching their children about money.