Yahoo Finance Allowances can be 'amazing financial teaching tool.' So how much should you give?
Canadians are still divided on the great allowance debate. According to a recent survey from Mydoh, a youth money management app owned by RBC, nearly half of Canadian parents give their kids an allowance, while the other half choose not to. The survey also found that many parents are unsure if they’re using allowances effectively.
While there’s not necessarily a one-size-fits-all approach to allowances, Yahoo Finance Canada spoke to two financial experts about some of the best practices to follow.
Allowances can be 'amazing financial teaching tool'
Understanding that cost can be a significant barrier, the first question parents should ask themselves is whether they can afford to give their kids an allowance, says Jessica Moorhouse, an accredited financial counsellor based in Toronto. If the answer is yes, she says they can be an “amazing financial teaching tool.”
“What I hear most often from adults is, ‘I never learned [about money] in school, I never talked about this with my parents. So, once I did start earning income, I made a ton of really expensive mistakes,’” Moorhouse told Yahoo Finance Canada. “It’s really about showing your kids how to manage money now so they will take those lessons into their adulthood.”
Moorhouse says an allowance is essentially the same system kids are going to experience when they’re earning income as an adult. And they’re going to have to manage their money in a similar way, such as setting savings goals for certain purchases.
So, why not start them young?
“If you can get those habits down … it’s not going to be a big learning curve when you’re making bigger money and things are a little more complex with your finances,” Moorhouse said.
The ABCs of allowances
Moorhouse has three guidelines for parents who want to give their kids an allowance. She calls them the ABCs: autonomy, buy-in, and consistency.
Although the Mydoh report found that nearly eight in 10 Canadian parents believe kids should be required to save a portion of their allowance, Moorhouse says this approach could “backfire.”
Her advice? Give them some autonomy and let them make mistakes, because that’s one of the best ways to learn.
At the same time, she says there needs to be some education involved.
Robin Taub, a Toronto-based chartered professional accountant who wrote a book on youth financial literacy called The Wisest Investment, recommends teaching kids how they can allocate their allowance between saving, spending, sharing, and investing.
“A young kid is going to need some guidance,” Taub said in an interview with Yahoo Finance Canada. “Once they’re a teenager … you’re going to be a little more hands off. Because they’re capable of making decisions on their own and you do want them to live with the consequences of their choices and learn that money is a finite resource.”
Next, Moorhouse says it’s helpful to involve kids in establishing the parameters of the allowance to ensure there’s buy-in and to avoid any confusion. Some of the topics to discuss include whether or not the allowance should be tied to chores, and who’s responsible for buying what.
“Really make sure they feel like they’re part of the equation and they’re not just being told what to do,” she said.
Finally, Moorhouse stresses the importance of consistency. Failing to give your kid an allowance after it’s been agreed upon can create mistrust and lead to a complicated relationship with money, she notes. Similarly, she strongly advises against withholding an allowance as a form of discipline, highlighting how similar tactics are used in toxic romantic relationships.
“We don’t want to enter that into the equation,” Moorhouse said. “Either they’ll just rebel against money in a bunch of different ways, or they may be attracted to a partner who has some of these behaviours that are recognizable from their past.”
How much should you give your kids?
On average, Canadian parents start providing an allowance when their kids are between nine and 11 years old, according to the Mydoh report. But Taub says most kids will be ready around the age of five, when, for instance, they might want to buy something from the store.
“It’s nice for them to have a little bit of their own money and start getting used to the fact that money doesn’t come out of a hole in the wall,” she said.
She suggests starting with small amounts.
The rule of thumb is to provide anywhere from 50 cents to $1 per week for each year of your child’s age, she notes. So, a seven-year-old might get $7 per week.
“With inflation now, maybe you’re giving them $10 per week,” Taub joked.
Ultimately, she says it’s a personal decision based on what families can afford. With young kids, Taub recommends starting with a cash allowance and using a multi-slotted piggybank before switching to a digital system when they’re old enough to grasp the concept.
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
