It's not when to start paying pocket money - it's when to stop
Parents have an important tool to teach their children financial skills that can last a lifetime
These days, giving pocket money is controversial. It has remained popular with many parents but many parents have also moved away from the belief that pocket money is the best way to improve children's financial literacy. Everyone has reasons for giving or not giving.
So should you give your children pocket money? Yes. Despite objections about giving pocket money, I think pocket money has a place in children's financial literacy.
Correctly given, pocket money can be a very effective tool in teaching lessons about earning money, saving, spending, donating, investing and even budgeting. Receiving pocket money may not be the first time your child is exposed to a money transaction but it's likely to be the first time the transaction affects them directly.
Unlike going to the grocery store and paying for the groceries with money given by mum and dad, receiving pocket money is real because the child gets to keep the money.
The child gets to decide what to do with the money later. If they have to save to buy their favourite toy, children also learn delayed gratification in the money context.
When these skills are developed over time, your child will cultivate good money habits that will help him make good money decisions in the future. I'm a firm believer in giving children pocket money but I don't agree with the conventional way of giving pocket money. If we want to realise the benefits of pocket money, we must be prepared to put some thought into it.
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 call this the conventional way.
I decided on an arbitrary amount to give. We live in one of the most expensive cities in the world (Sydney) so the dollar doesn't buy much these days.
The amount of pocket money I gave my children was dictated by how much I thought they would need to buy ordinary items at the shops.
I then went through the weekly ritual of handing over the money to my children. Sometimes this might be accompanied by words of wisdom such as: Spend it wisely; on't go spending all of it; on't spend it all on junk; and save some for a rainy day.
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 most effective way to give pocket money. I learned this the hard way.
A fundamental problem with this approach is that I allowed society's spending habits to dictate how much pocket money I give to my children.
Instead of choosing an amount that made sense to me as a parent of young children, I allowed the price of goods and services to influence the amount my children ought to receive.
Another 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 can't explain why one child gets a certain amount and another child gets another amount. Or why both children should get the same amount.
We also 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.
To achieve a common understanding, we need to have a conversation with our children about pocket money.
Miscommunication is the underlying cause of a lot of angst between parent and child.
We have not set boundaries for the money, we haven't explained why we're giving them the money and we haven't set our expectations about what happens to that money once it leaves our hands. Maybe it's because we are not sure why we're giving them pocket money. If this is the reason, then we ought to clarify the reasons for ourselves first, before we give pocket money.
The better way to give
Giving pocket money is more than handing over an arbitrary amount every week while espousing words of wisdom to the children.
If you decide to give pocket money, there are a few things you need to think about.
When to start giving
Most children start receiving pocket money from the age of six. This is not to say that money is taboo for children under the age of six. The earlier children are exposed to money concepts, the easier it is for them to learn more complex money lessons as they grow older.
Up until the age of about six, children's exposure to money should be fun. They learn about money in the abstract - what it looks like (notes and coins), where to keep it (money box) and what they can physically do with it (spin it, roll it, fold it).
From about seven years old, children begin to understand the concept of money as something valuable. It's no longer about seeing money as an object. Now they begin to understand money as a valuable commodity. It has the power to make things happen, like buying things.
So it's now time to teach them how to be responsible with money. It is also from this age that money lessons are dictated by the child's maturity and understanding about money rather than the age of the child.
How much to give
One good formula to follow is to give the child $1 for each year of age: a six-year-old will receive $6; an eight-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 stopping or reducing the amount you give to encourage them to get a part-time job or find other ways to legally earn money outside the home.
How often to give
Weekly pocket money works best for children up to the age of 10 years. Decrease the frequency to fortnightly or monthly for older children because from 11 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 children about the money as you hand over their pocket money.
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? Discuss with them what they are allowed and not allowed to spend their money on.
It's their choice but you have the right to veto. For example, they cannot spend all their money on lollies.
Writing down these rules can be useful to resolve any future disagreements. You can 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.
When to stop giving
Pocket money is not supposed to go on forever. We don't want pocket money to hinder children from finding ways to earn their own money. Nor do we want to be raising "kidults" or funding their adult lifestyle.
It's 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. If you are not ready to cut off their pocket money supply on that future date, you can extend this date.
It's always easier to extend the time to inflict financial pain than it is to inflict the pain itself, so setting up the expectation of an end date at the outset will minimise any angst later on.
Pocket money is one of the tools we can use 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 that are learnt over time become 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.
Whatever your time frame to stop giving pocket money, you should be reducing the amount you give to your child once they are old enough to work. This will encourage them to get a part-time job.
This is an edited extract from Kids Money Habits by Amy Koit, founder of kidsmoneyhabits.com.