#PocketMoney - the most underrated Financial Education tool
5 ways to use pocket money to form life changing money habits
If we teach our kids good money habits then they are more likely have greater confidence, less money worries and improved mental health when they become adults. Pocket Money is the ultimate tool parents can use to help teach their kids good money habits and change their financial future for the better.
It’s worth noting up front that research from behaviour experts Sue Bingham and David Whitebread of the University of Cambridge, found that our approach to money, such as planning ahead and delaying gratification, is set by age seven.
In this blog I set out 5 ways you can use pocket money to teach your kids life changing money habits that most adults fall foul of.
I appreciate that some people might have some financial challenges and therefore feel they don’t have enough spare cash to give their kids any money. The best thing about pocket money is that it doesn’t matter how much money you give, as long it’s some so they get the chance to learn good money habits.
The other challenge some people have is that they just don’t have any physical cash to hand to give as pocket money as we increasingly move to a cashless society. I discuss my thoughts on this at the end.
Before I outline how you can use Pocket Money to teach your kids good money habits, let’s discuss:
When should kids be given pocket money?
By this, I mean in what circumstances should kids be given pocket money? Should it be linked to good behaviour or, completing chores or school work? There is lots of different and conflicting research on this topic. This implies that it doesn’t make a huge difference when you give them their pocket money, just that they get the opportunity to manage money early. Below is what we do as a family and why, but as I said this doesn’t mean doing something else is wrong or worse.
We give our girls pocket money each week regardless of chores or behaviour - they essentially just get the money as they are part of the family. Why have we taken this approach? The key is that we want to teach them about money. At this early stage we don’t want any barriers to start the conversation about money. If they don’t do their chores or show bad behaviour then we use other ways to manage that. The last thing we want to do is say that our kids didn’t get the chance to learn about money as they were naughty when they were little (although I note our kids are pretty well behaved - at least for now!).
In terms of chores, we believe that each family member should be doing some chores rather than it being seen as a paid job (again, I know a lot of people who link pocket money to chores which is totally OK, we just chose not to). Also, we want to avoid any negative links to money at an early age so don’t want to have scenarios where money is withheld or taken away.
At times we do provide small financial rewards if they proactively help out on a job that helps the family and is beyond their usual chores. This reward is more for their hard work and attitude rather than the outcome of the task. Like standard chores, we do not provide financial rewards for school work or results as we believe this is something they should do regardless of money and should be incentivised in other ways.
So that’s what we do and it keeps it very simple.
I won’t go into how much we give as pocket money as the amount people do very much depends on individual factors such as how old your kids are, how much you can afford and, what country you live in etc. The key is that it doesn’t matter how much, it’s all about the habits they form with the money they do get.
5 ways you can use pocket money to teach your kids life changing money habits:
1. Save before they spend
Pocket money gives you the opportunity to instil one of the best money habits of all time. That habit is “save before you spend”.
Sounds simple but most people today do it the other way around. They say “I’ll save whatever I don’t spend”, i.e. spend before they save. In most cases, most people end up spending most of their money and therefore not saving much, if any at all.
Therefore, when you give your kids pocket money, encourage them or insist they put 10% or 20% away for the long-term. Make sure this is an action so they see they physically had the money and are now saving it, i.e. don’t just do this on their behalf without them knowing as they need to do the action themselves to form the habit.
It really doesn’t matter if the amount saved is very small. It will soon add up. Also, as the amount you give them as pocket money increases as they get older, the amount they save will also increase.
With the pocket money they do want to save, you might want to keep it in a jar or box and then after it has got to a certain amount, you transfer it into their long-term savings or investment account.
Forming this habit at a young age is very powerful. When they are adults they will hopefully “pay themselves first”, i.e. put some of their salary into savings before paying for their expenses each month.
This “save before you spend” habit is the key theme of one of the most popular personal finance books of all time, ‘The Richest Man in Babylon’ by George S Clason. This book is definitely worth reading. See link at the end of this blog for more information on it and other book recommendations.
2. The Value of Money
Teaching kids about the value of money at a young age should give them a much greater appreciation of the things you buy for them.
To do this, when you are out shopping ask them how much they think something costs. As the absolute amount might not be clear, you should ask in terms of their pocket money amount. For example, how many of those sweets do you think you could buy with your pocket money? or how many weeks pocket money do you think it would take to buy that toy?
If you do this often enough, they will start forming a sense of the relative value of different things. They will hopefully then see how important it is to save if they want to buy more expensive things and how generous you are when you buy toys or other things for them directly.
3. Delayed gratification
Getting your kids to think of something they want but can’t buy now is a powerful way to teach them about delayed gratification.
“People who delay their gratification for a later day or time, end up having more success in all areas of life; financial, health, career and relationships.” (unknown)
To do this, the pocket money they have left over after putting some away in long term savings can be saved for a particular toy or something else they might want. Make sure it is realistic, i.e. don’t get them to want to buy something that will take them 3 years to save up for. Maybe something that they can buy in 4 to 8 weeks if they don’t spend their pocket money in the meantime.
Whatever you do, do not say that you’ll buy it for them now and you’ll take the money from future weeks pocket money. In this scenario they still get instant gratification and they will see positives in taking out debt to meet their desire of instant gratification.
4. WANT versus NEED
One of the reasons so many adults struggle with money today is that they spend so much on their WANTS. These are things that we buy but don’t really NEED.
Kids shouldn’t really be using pocket money for the things they NEED as that’s the parents role. That being said, it is a great opportunity for them to learn the difference between WANTS and NEEDS. No doubt they will say they NEED something but actually they just WANT it. So helping them understand this difference when they do say they NEED something will help them in the future as they will have a better understanding of what a NEED really is.
Another good tip is to tell your kids they can have what they want but have to wait a few more days until they can buy it. If they still want it after a few days then that’s fine. In a lot of cases, they are likely to forget about it and have more money to buy something they actually really want.
Essentially, you want them to learn that they should focus on spending their money only on the things they NEED or REALLY WANT (are willing to wait for) and not the things they just happen to WANT that day (an IMPULSE WANT).
5. Make money a positive topic
In most societies, money is all too often a taboo subject. Kids pick up on this feeling and see money as a negative topic. We need kids to be confident and positive about money as this can increase their overall self-esteem and mental health as well as reduce potential money worries in the future. So parents should talk about money more often and in a positive manner. Pocket money is a great way to have these conversations about money with them.
I’m not saying you should be talking about your salary and how much money you do, or don’t, have with your kids. You should be talking about what money is, how to save it and good ways to earn and spent it.
Remember, if your kids are knowledgeable about good money habits, they are likely to help make sure you stick to these habits yourself!!
A quick recap on the 5 ways to use pocket money to help your kids form life changing money habits:
Save before they spend: Get them to save 10% to 20% of their pocket money for the long-term
Value of Money: Ask them how much things cost in terms of their weekly pocket money amount
Delayed Gratification: Get them to save for something to delay their gratification
WANT versus NEED: Avoid them spending on IMPULSE WANTS
Make money a positive topic: Use pocket money to start positive conversations about money
Action: Next time you give your kids pocket money, make sure you take that opportunity to help them form good money habits. If you are not giving them pocket money, maybe now is a good time to start?!
Pocket money in a cashless society tip:
Not having any cash in the house is fast becoming one of the main reasons parents struggle to give pocket money. Some simply don’t have any cash in their purse or wallet as they don’t need cash these days as we move to a cashless society.
I understand there are pocket money apps and child debit cards available and I believe these have some merit but, where possible, I’d recommend parents to use physical money when giving pocket money. The apps focus more on spending than savings (typically app companies get paid per spend transaction) and don’t bring money to life like having physical coins and notes.
Here is a quick tip for overcoming the problem of not having cash each week for pocket money. Start consciously building up a pot of money which you’ll use to give the kids as pocket money. Then when your kids do want to use pocket money to buy something, you can get them to give you the cash and then you pay using your card. This way the cash stays within the house so you reuse the same coins / notes as pocket money over and over again. Same with their savings, if they want to save then they give you the cash and you transfer the amount to their savings or investment account whilst reusing the cash for future pocket money. Simple!
There you have it. I hope you start using pocket money and these 5 relatively simple ways to help your kids develop life changing money habits from a young age. If they use all these then they are truly on their way to becoming a Financial Superhero.
What to do now?
If you haven’t subscribed then make sure you do so you don’t miss out on other blogs to help you teach your kids about money and, to get the free ebook ‘How to train your kids to become Financial Superheroes: www.bluetreeblog.com/ebook
Check out these book recommendations to help teach your kids about money: www.bluetreeblog.com/resources
Make sure you are saving in the most effective manner for your kids so they get the most out of the pocket money they save for the long term. This is discussed further in the blog ”Invest rather than save” https://www.bluetreeblog.com/post/save-by-investing
Thanks for reading!