raspberries in hand in page

Roman Kozak got his first inkling his youngest daughter, who was in pre-school at the time, might be ready to learn a bit about finances when the pair was perusing the toy aisle in Target.

“I remember kneeling next to this little munchkin and asking her whether she would like me buy the toy on the shelf for her, and she reaches down, turns it over, looks at the price, and responds by telling me ‘thanks dad, but it’s too expensive’ – it was literally a couple dollars,” recalls Kozak, vice president, senior retirement planning consultant wealth strategies group at RBC Wealth Management in Minneapolis.

“I was amazed that a little kid would turn down an offer to buy her a toy based on her assessment of the price, and whether she really needed it … it was ‘proud parent’ moment.”

While both his daughters are now attending college, Kozak and his wife used the early days as a springboard to help instill financial responsibility, using simple concepts like piggybanks and allowances as tools for guiding their daughter’s economic acumen.

“You can’t start too early for financial literacy,” he says. “Even little kids have a concept of saving something.”

And the sense of responsibility created by tying allowances to chores at an early age can have a life-long impact.

Research collected by Marty Rossmann, emeritus associate professor of family education at the University of Minnesota, who spent over 25 years examining 84 children from pre-school to their mid-20s, found those who had chores at a young age were “more likely to have good relationships with family and friends, to achieve academic and early career success and to be self-sufficient.”

Introducing concepts like allowances, chores and saving, forms a bedrock for young people as they move throughout their life, helping them plan ahead, separate ‘needs’ from ‘wants’ and make better choices surrounding both their financial and life goals.

This little piggy saved

When his kids entered first grade, Thomas Six, a wealth strategies consultant at RBC Wealth Management in San Francisco, purchased a plastic piggy bank with four sections – one for spend, save, donate and invest.

“My wife and I told them, whenever you receive money (from the tooth fairy or birthdays) you have to put some in each category,” says Six. “You can choose how much you want to put in the spend, save or invest categories with the exception of donate, which you have to put in 10 percent of whatever you get.”

Once the money was allocated, the kids weren’t allowed to shift from section to section.

“It encouraged them to consider how much they’re putting in each one next time,” he says.

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Kozak agrees with the piggybank approach.

“They appreciate that that money is sitting in there and being saved,” he says. “[It teaches them] the basic notions of why you’re saving, that you don’t have to go out and spend every time you want something and that when you save, it'll give you an opportunity to build up a dollar amount that at some point will hopefully be put to a good use.”

The architecture of allowance

A survey by coupon site VoucherCloud found that parents give children under 10 an average of about $113 a month. While more than three quarters of those surveyed give their kids an allowance, fewer than half say it’s in exchange for chores or helping out and 55 per cent say the funds are handed over as a bribe so the kids will behave.

While both Six and Kozak vary in their approach to setting up an allowance, both agree that just handing $25 to a child breeds a sense of entitlement that can lead to irresponsible behavior with money further down the road.

“There has to be a quid pro quo; this for that,” says Kozak.

One way to set up a basic understanding of payment for goods or service is to use an allowance as a financial reward for household chores or exemplary grades in school.

In Six’s family, allowances were rewarded as remuneration for extraneous chores outside of the regular responsibilities like cleaning their room or helping wash dishes after dinner.

“There were expectations of basic chores tied to being members of a family and then we’d give our kids optional chores tied to remuneration,” he says.

Case in point: Scrubbing the deck or helping Mom or Dad post a listing on Craigslist could net the kids a little financial reward. As the children got older, Six and his wife would often open up the issue of compensation for these side chores to a little friendly negotiation.

“I’d try to encourage them to throw out the first figure so there’s no gauging by what Mom or Dad says and then we’d try to meet in the middle,” says Six. “It’s a great way to get them to understand the value of their effort and negotiate for what they think it’s really worth.”

Both agree the allowance stage can be a good time to set up your children’s first bank accounts and teach them how to monitor their savings, purchases and interest.

The bank of Mom and Dad

As the kids enter their teenage years, those chocolate bars and action figure often turn into bigger-ticket items like electronics and concert tickets. It often opens the door to borrowing from Mom and Dad, which can be another great tool for fostering good money practices.

Six says he wasn’t afraid to let the kids borrow money from time to time, provided they were okay with paying a little interest.

“In the future when they get that birthday money, then they’re going to have to first pay off their debt to Mom and Dad,” he says. “Without getting financially possessive, [we were] trying to teach them when you borrow not only do you have to pay back what you initially borrowed but there’s interest and you need to pay that back too.”

Kozak had his own approach, which he calls the “time, place and manner doctrine.” When the kids asked for money, he’d evaluate it based on what the timing and need for the money was and the way the kids asked – was it polite and respectful?

“And the kids, to their credit, would say ‘here's where we're going, here’s why I need this’ and they were always fair and reasonable about the amount,” he says. “Nobody was trying to fleece us for extra money.”

Fail now, succeed later

Of course there are times where growing pains are to be expected, says Six.

“Maybe at the end of the month they found something that they really liked,” he says adding that sometimes they couldn’t afford to purchase it because they’d spent their money on ephemeral purchases like chocolate bars or junk food.

“I say you stand back and watch them fail spectacularly at eight or 10 rather than seeing them fail at age 24 when there’s horrible consequences,” he says. “The best thing we can do for them is give them the opportunity to learn about the consequences of their efforts and how it relates to money.”

Graduating from allowance to college

Eventually, part-time jobs like babysitting or mowing lawns take over and your teenager will transition towards earning their own income, which allows for more financial independence and affords an opportunity for more sophisticated financial lessons

As they start to become ready for concepts like loans and credit, Kozak says it’s worth a conversation with some outside advisors.

“On two different occasions – first when they were rather young and (when) heading out to college – we had them sit down with personal bankers,” he says. The goal was to have the bankers speak with the children, and later, teenagers, and communicate with them directly, responding to questions and opening them up to the banking atmosphere.

Looking back, Kozak says the foundation built in the first meeting has reverberated out as his youngest – the same one tipping up the toys to check the prices – moved on to college.

“It doesn’t mean they’re infallible by any means, even the most seasoned adults can be financially irresponsible,” he says. “But I think starting early and having the kids understand how money works, what it should be used for and what it shouldn’t be used for [helps them] start to develop an appreciation for money.”