Many people do the pocket money thing, yet there is no one adopts the same method. I believe in giving young children pocket money. As a law lecturer, my lessons are most effective when I have communicated my messages clearly. I teach the same subject to multiple classes year after year, yet I never teach my classes the same way. The style I use in each class depends on so many variables it would be impossible to replicate each class. Some of these variables include student composition and the dynamics of the room. My energy level throughout the day is also a factor that guides my style. Given these variables, the tools and strategies I use to teach each of my classes will be different.
Teaching tool: pocket money
One of the tools to communicate messages about money is pocket money. But tools are only effective if we have a plan on how to use them. Not having a clear plan for using the various teaching tools is one of the most common mistakes parents make. Find out what other common mistakes parents make. Download Top 5 mistakes parents make when teaching their children about money the end of this page.Whether they are lessons about saving, spending, donating or investing, pocket money, when given correctly, can be a very effective teaching tool. Receiving pocket money may not be the first time your child is exposed to money transaction. But it is likely to be the first time the transaction affects them directly.
Going to the store and paying for groceries with mum and dad’s money is a good experience for handling money. But receiving pocket money is more real to the children because they get to keep the money. They also get to decide what to do with the money later. If they have to save up to buy their favourite toy, children also learn delayed gratification in the money context.
… pocket money, when given correctly, can be a very effective teaching tool.
When these skills are developed over time, your child will cultivate good money habits that will help him or her make good money decisions in the future.
The correct way and the wrong way to give pocket money
In a previous post, I explored some of the objections parents have for giving pocket money. Even though I believe in giving children pocket money, I don’t agree with the conventional way pocket money has been given. If we want to realise the benefits of using pocket money as a tool, we must be prepared to put some thought into it for it to be effective.
Did you know there is a correct way and the wrong way?
How to give pocket money
Many parents pick an arbitrary amount to give to their children – $10 per week, $20 per week, etc. Parents then hand over the money as a weekly ritual. Sometimes it might be accompanied by “Spend it wisely” or “Be sure to save some”. However, simply handing over the money with these words of wisdom will not cultivate any good money habits in the children at all. On the contrary, children will start to believe that mummy or daddy is like an ATM – an ATM that makes noise about money. Every so often they get money. If you do decide to give pocket money, there are a few things you need to think about:
… simply handing over the money with these words of wisdom will not cultivate any good money habits in the children at all.
1. When to start giving?
Most children start receiving pocket money from the age of 6 years old. This is not to say that money is taboo for children under the age of 6 years old. In fact, if we exposed our children to money concepts early, it becomes easier for them to learn more complex money lessons later, as they grow older.
Up until the age of 6 years old, children’s exposure to money should be fun. They learn about money in the abstract – what it looks like (eg. notes and coins), where to keep it (eg. money box) and what they can do with it (eg. spin it, roll it, fold it). From 7 years old, children start to understand the concept of money as something valuable. It is no longer a curiosity about what money is. Now, they begin to understand money as a valuable commodity. It has the power to make things happen (such as buying things). So it is now time to teach them how to manage money.
From 7 years old, children start to understand the concept of money as something valuable.
2. How much to give?
One 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. This takes away any perceived unfairness that can arise if an amount is picked arbitrarily and randomly. By the time the child is working age, you should consider reducing the amount you give to encourage them to get a part-time job.
3. How often to give?
Weekly pocket money works best for young children. Increase the frequency to fortnightly or monthly for older children. From 12 years old, children are able to exercise delayed gratification. Children in this age group should be taught how to budget to make their money stretch before they receive their next ‘pay’.
Pick a day of the week where the family is not busy and spend some time talking to your child about the money as you hand over their pocket money.
4. What lessons do you want to tie to the pocket money?
Every time there is an exchange of money, it is an opportunity to teach or reinforce a money lesson for the children. You have the power to decide what money lessons your child will learn when you hand over their pocket money. Here are some money lessons you may wish to teach and the conversations you can have with your child:
- Saving: Encourage your child to keep their money away safely in a money box (or bank account for older children).
- Spending: Help your child decide how much of their pocket money they should set aside for saving and how much for spending.
- Donating: Philanthropy is an important lesson 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.
- Investing: Mid-teen years are the best years to start teaching children about the concept of investing. But young children can also be introduced to the concept if they have the financial maturity to understand. Start by explaining the concept of bank interest on deposits.
You have the power to decide what money lessons your child will learn when you hand over their pocket money.
5. What rules will you have?
Now that you have empowered your child with money, decide what rules you will have.What limits will you set to their use of the money? Decide 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.
Writing down these rules are useful to resolve any future disagreements. You can also add to or modify the written rules as needed. If you have more than one child, these rules serve as the consistent approach to pocket money for every child in the family.
Pocket money for completing household chores
Some parents give pocket money with no strings attached. Some parents give pocket money on the condition the children complete household chores. Which approach you choose depends on the lesson you want to teach your children with pocket money. Remember, it is simply a tool to teach children money lessons. If you want your children to learn about earning money, then giving pocket money for doing housework is one way of teaching them. If you want to teach your children other money lessons that do not involve the exchange of labour for money, then don’t link pocket money with completing housework.
In this clip, the Koch family explains how they did it:
When to stop giving
Pocket money is not supposed to go on forever. It is important that you decide, at the outset, when you want to stop giving your children pocket money. This should then form part of the conversation you have with the children at the start of giving them pocket money. This sets the expectation for both the parent and the child as to when they can expect to stop getting pocket money.
We don’t want pocket money to be a hindrance for children to earn their own money. Nor do we want to be funding their adult lifestyle.
Pocket money is simply a tool to teach children about money. The timing of when to stop giving pocket depends on the lessons you want to teach your children. Money lessons, when learned over time, becomes a habit. Once your child has developed the habit, it’s time to move onto other tools to teach other lessons and develop another habit.
How I give my children pocket money
I give my children pocket money for 12 months only. Yes, you read right – they only get pocket money for 1 year. I introduce the concept of pocket money to the children on their 6th birthday. They are told:
- the rules about pocket money,
- how much they get
- how often they will be given pocket money and
- when pocket money will stop.
On their 7th birthday, I stop giving them pocket money.
It’s only 12 months because I use pocket money as a tool to teach my children the beginnings of budgeting. Every week, I tell them to keep some money in their ‘saving box’ and some money in their ‘spending box’. Over 52 weeks, my children cultivate the habit of setting aside some money for saving and some money for spending. Once they have developed the habit of setting aside money for different purposes, pocket money is no longer necessary as a teaching tool.
What is your plan?
Pocket money is a tool for teaching children financial literacy. But unless you have a plan on how to teach your children about money, these tools won’t be much help. 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.