9 Ways Allowance Can Teach Your Kids About Financial Literacy

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Allowance is a hot topic in the world of parenting. Some are strongly for it, some strongly against it, and many are somewhere in the middle. We're not here to say whether it's a method you should or shouldn't put into practice, however, should you decide to, here are a handful of ways in which giving children an allowance can teach them some important lessons in financial literacy.

These lessons are best learned when the idea of allowance, and putting it into practice, are done mindfully and intentionally, with plenty of consistent conversation and direction.

Learning how to collaborate with others to come to an agreement while asking clarifying questions.

Rather than verbally letting your kids know you'll pay them if they do such-and-such each week, take the time to sit down together and explain the concept of an allowance. Draw up a "contract" together, in which you clearly lay out what is expected of your child in order to earn their pay. Consider including not only the tasks they need to complete but when and how they are to be done, when they'll get paid, whether or not they will be eligible for a "raise" down the road, if they have any "excused absences," and so on. Encourage them to ask questions or make suggestions to ensure they fully understand what they are agreeing to, and read it over together before having them sign it.

Realizing the value of being a hard worker.

Hold true to your word (and the contract) and, if the requirements aren't met, take the time to explain to your child why they won't be paid the full amount — perhaps they skipped a day altogether, or the task wasn't done up to the standards they know they're capable of. Consider incentivizing them for doing their best each day by giving them "monthly reviews" and agreeing to increase their pay for good performance (and good attitude)! If they're struggling with a task, or seem overwhelmed, take the time to sit them down and hear them out — talk through how you might be able to help them, how they can help themselves, or how you can adjust your agreement.

Counting dollars and cents.

For younger kids, allowance is a great way to help them learn to count money on a regular basis. Try paying them in different ways each time (bills and coins of different values) and having them count it out each "pay period" to ensure you've given them the correct amount. Occasionally check in and ask them if they want to exchange their smaller bills and coins for larger ones, and have them tell you (or walk them through) how to do the trade.

Learning the art of budgeting.

Ultimately, your children get to decide how to spend their hard-earned money. But you have the ability to talk to them about saving versus spending. Take the time to chat with them about their short-term and long-term goals. What kinds of smaller purchases or experiences do they want to spend their money on right away? What are some of their loftier goals? Help them determine how long it will take them to reach their savings goals and break down what they should put aside and what they can afford to spend. Here are some free printables to help them keep track!

Understanding the value of saving and earning interest.

Encourage good savings habits by explaining the benefits of putting a set amount of earnings from each "paycheck" aside and illustrating the concept of interest earned on their money. Here are some simple ways to explain interest to kids. Offer to give them a certain percentage each month on any money they decide to save, or offer to match their dollars up to a certain amount.

Making wise spending decisions.

Again, your child has the ultimate say in what they decide to do with their own money, but that doesn't mean you can't offer suggestions and guidance. If they decide they want to spend it, make each purchase a learning opportunity. When they wind up with a basketful of goodies they clearly can't afford, help them pick and choose what they want most by adding up what each item costs and using the process of elimination. Also, teach them the art of looking for better deals elsewhere, price-matching, and shopping clearance for those larger purchases!

Building a relationship with a local credit union.

Many financial institutions offer savings accounts for young children, and checking and savings for teens, that come with extra rewards and incentives. Our Credit Union Buddy (CUB) Club is a great option for youngsters, and encourages good grades with a monetary incentive. Our Livin' Free Checking and Livin' Free Savings accounts for older kids work just like grown-up accounts, but offer perks like Oops Refunds and higher dividends. The bank or credit union shouldn't be a scary or unfamiliar place to your kids once they've grown up, so don't hesitate in setting up an account for them early and taking them to make their own deposits and withdrawals, and interact with the staff!

Learning about borrowing money and owing interest.

If your child has come close to saving for a big purchase and, for whatever reason (the item is being discontinued, there's a great sale, the concert is next week, etc.), they need a little assistance in getting those final few dollars, it's a great opportunity for you to step in and teach them about borrowing money (and that it doesn't come free). Let them know you're happy to provide them with the funds they need to make their purchase, but that they'll have to pay it back — whether through interest or a deduction in their allowance "paycheck" each pay period until the "loan" is paid off.

Learning how to negotiate a raise.

If your child really takes to the idea of an allowance, and is consistently going above and beyond, they may naturally wonder whether there's any way they can make more money for their efforts (or you can introduce this idea to them). Request that they come up with a case for themselves (What extra tasks are they doing without being asked? How does this bring value to the home? What are their goals going forward?) and sit down with them to discuss whether they're in a position to earn more, and if not, what they can do to make it happen. This might require an adjustment to the "contract" you came up with earlier, so you have in writing what's expected of them.

Here are some additional thoughts and tips on this topic:

• The Pros & Cons of Giving Kids an Allowance
• 10 Allowance Do's & Don'ts
• Allowance Advice for Well-Meaning Parents
• Making Kids' Allowance Count: Teaching Financial Literacy
• What Do You Want Your Kids to Learn from Allowance?
  
• Allowance for Kids - Types of Chores & How Much to Pay for Them
• The Right Way to Give Kids an Allowance

What are your thoughts on giving your kids an allowance? Share with us in the comments!