Personal Finance for Children and Pre-Teens

When I graduated from high school, I didn’t know anything about personal finance, except how to balance a checkbook. I’ve learned a lot through the school of hard knocks, and I’m grateful for what I’ve learned, but I wish I would have known more before I headed out to college on my own. One of my goals as a parent is to make sure my children are financially prepared to survive in the real world.

Madison at My Dollar Plan and PaidTwice at I’ve Paid For This Twice Already have covered the pre-grade school years, and today I’m going to cover ages 6-12. I’m going to break this post into two parts, because I change the way I do things with my children at age 10. My technique for teaching my children how to manage their money is taken largely from Debt-Proof Your Kids by Mary Hunt.

Age 6-9

By the time children hit first grade, they are generally starting to learn about money in school. They begin to learn that a quarter is more than two dimes, and that dollars are worth even more. They are also old enough to grasp the concepts of savings and giving.

When our children are between 5 and 6 years old, we move from the responsibility chart I told you about recently to a regular allowance. To make it easy and fair, we give 50 cents for each year of age. Right now our 9 year old is receiving $4.50 a week and our 5 year old will be receiving $2.50 a week when he starts getting an allowance next month.

There are two schools of thought when it comes to tying allowances to chores. The first is that children are paid for their chores, and if chores aren’t done, the child doesn’t get his allowance. The second idea is that children are part of the family, and because they’re part of the family they do chores, and they also receive the benefit of an allowance just for being part of the family.

I don’t really feel strongly either way, but we’ve chosen to not tie allowances to the chores. Our primary reason is that our daughter is not at all motivated by money, and she’d just as soon skip the chores and not get paid. The second reason is that I believe in easy systems, and keeping track of what chores are done and how much money to dock a child is just too complicated for me.

In the grade school years, our children are required to tithe 10% of their allowance. They split the remainder in thirds. One third goes to long term savings (for college or a car), one third goes to short term savings (for a toy they might want), and one third is blow money. This system works pretty well for my daughter, who usually ends up saving everything, and I think it will work well for my son, who would probably spend everything right away if we didn’t make him save some.

Teaching children the importance of giving and saving at a young age is really important. I don’t want my children to get into the habit of spending everything they bring in. That’s a really hard habit to break. I know, because it’s a habit I had to break!

Age 10-12

When our daughter turns 10 next month, my husband and I are planning on moving her from an allowance to a salary. Liz’s salary will be loosely tied to chores, and she will be responsible for budgeting (with lots of help) for certain expenses. She will be paid once a month, so she can begin to get a feel for what it’s like to have to make a “paycheck” stretch for a longer period of time.

We’re going to start her out slow and have her be responsible for birthday and Christmas gifts for friends and family, toys she wants to buy, and extra activities, like movies with a friend or other activities that don’t involve the family. My husband and I will sit down in the next couple of weeks and figure out how much we spend on these things for her over the course of a year, divide that by 12, and that will be her salary.

We’ll help her look at the coming year and make note of birthdays and other events she knows she’ll need money for. We’ll also encourage her to save some extra money for last minute invitations to activities. But in the end, she’ll be responsible for deciding what to do. If she spends her whole salary in the first week, and then gets invited to a birthday party, she’ll have to decide whether she wants to make a gift out of things she has or skip the party. As a mom, I’m sure the mistakes will be hard for me to watch, but I’d rather have her make mistakes now when I can guide her, than later when the stakes are higher.

As far as chores go, she will still have her responsibilities, and she can choose to do them, or she can hire someone else to do them for her. Her room will have to stay clean, but if she doesn’t want to clean it, she can pay me or her younger brother to clean it for her. I’m sure it won’t take her long to figure out that cleaning her own room is better than having to dish out money to her younger brother.

As each year passes, we will increase our daughter’s salary and responsibilities, so that by the time she graduates from high school, she will be used to budgeting for almost all of her expenses, and will be well versed in giving and saving part of her “paycheck” and living on less than she earns.

For learning more about this system, I highly recommend Mary Hunt’s Debt-Proof Your Kids. This book focuses mostly on teaching finances to children ages 10-18, but it does have good tips for the younger crowd as well.

What’s your system for teaching financial matters to children? Do you have a plan? Are you winging it? Please share your tips in the comments.

Money Matters for All Ages Series

Make sure you check out the rest of the Money Matters for All Ages series. I will be adding new links as they go live, so check back frequently. Here is the schedule of posts:

10 thoughts on “Personal Finance for Children and Pre-Teens”

  1. That’s a fantastic plan. I am always inspired by the things parents do to help their kids build a solid understanding of money and budgeting. I’ve helped my teenage son establish his own accounts with netflix and gamefly (he has a part-time job). He is responsible for his monthly fees for each account and I have the ability to monitor them thanks to parental control features on each site. He’s been doing a great job keeping up with his accounts and has learned a great deal where budgeting and savings is concerned. His choices on a consumer level have been greatly honed and his overall spending has become more thoughtful and planned. Case in point where his gamefly account is concerned. He’s learned that rather than forking over $50/$60 a pop for new video games he can pay his $23/mo. membership fee and try out several of them without having to buy. At the rate games are released, he would never be able to keep up financially and play everything he wanted to. He gleefully pointed out to me recently that he spends in almost three months what he would in one shot for one game and has the added benefit of being able to send back games he doesn’t enjoy rather than having spent his money on something he’ll never use again or that he’ll get a fraction of a return on selling used. Having responsibility for these accounts has taught him how to watch where his money is going and determine whether or not he’s getting the best return on his investments. His father and I couldn’t be more pleased with his thoughtful observations and smart spending. Tools that will last him a lifetime!

  2. Lynnae, my husband and I began a similar process several years ago with our four kids but we quickly got bogged down by the administrative detail. It seemed simple enough……but with everyone so busy, it was so easy to forget, or make mistakes, or keep track, etc. We needed help!

    That’s why we created Active Allowance – to help us get and stay organized, consistent, fair and ummmm, unforgetful :-)

  3. @Harris – I have that same concern, which is why I don’t really tie the allowance to the chores between ages 6-10. When I put my 10 year old on a salary, she will get paid every week, regardless of whether her chores are done. However, if she doesn’t do her chores, she’ll have to take some of that money and hand it over to whoever does her chores for her. I figure that’s good preparation for the real world. You either do the work, or pay someone to do it.

  4. I agree that it is important to teach your children about responsibility. You have some good ideas here. My one concern is that they may associate doing chores with making money, instead of understanding the importance of getting chores done.

    You are also teaching them an important economics lesson. If their time and energy is worth more to them than doing the chores, then there is nothing wrong with paying someone else to do the work. Then if the child can’t afford anything else, he or she will learn that lesson too.

  5. Our church is actually pretty good with the tithe. Rather than just putting the kids’ money into the offering plate (which I let them do if they want to), the children have the opportunity to give in their Sunday School class. Right now my daughter’s class is sponsoring a boy in a third world country. They talk about him, and they know where the money is going. I think that helps immensely.

    In teaching about tithing, as with anything, I think you have to talk about it a lot, so the kids understand the purpose. Communication is key. :)

  6. I like the idea of converting older kids to a salary, in fact our kids are on commission. They get work for chores done around the house. Don’t work, don’t get paid…that’s out motto!

  7. I’m always interested in whether forced savings actually work. Is the action of saving money alone good enough to keep people doing it once they have the responsibility for themselves, or do you have to choose to do it to really own it?

    I guess if you do save the money, you see the benefits eventually, but money that’s tithed just disappears from a practical point of view – I think that’s difficult to teach effectively.

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