Pocket money: yes or no?

Valuable lessons on the way to”financial adulthood”

Pocket money:

• Should we or should we not give it to our kids?
• Should we or should we not open a child bank account? 
• Should we or should we not give authority over the money we allocate them?

Yes, to all three. Let me explain why. I am an economist and for decades I dealt with multi-million dollar accounts. I allocated funds, budgeted, and approved or denied colossal transactions. And when shuffling around large sums of money like I did, I had to have confidence in my craft, as much as my employer had to have enormous trust in my ability to forecast accurately. As a result assessing the longterm consequences of any decision became my lifeblood. And because it was hammered into me, I cannot help but forecast the impact of every major action, financial or not.

So my professional experience gave me the great opportunity to pass this financial acumen on to my son, Tamás. Tamás is now 22, but I still remember how much he was looking forward to having his “own money”. From the age of 8 to10 he was constantly pestering me to open a bank account for him so he can have his own “chi-ching” card as he called the bankcard. And once he has it, he will pay with it everywhere and listen to that chi-ching sound.

We were living in the UK at the time and I don’t exactly remember what the age limit was for opening a child account, but finally the day came and we walked into the bank and opened an account for him. Our agreement was that from that point forward I transfer his pocket money to the account, and he does whatever he wishes with that money.

As stated before, I am pro pocket money. Even before opening the bank account, Tamás had received pocket money regularly and with that his financial education had begun. Of course, I still had to explain over and over that yes, that it is possible to run to the closest store and buy things you momentarily want, but that there was another option. That was to wait and save up the money for something you really desire. Still, I had held up my end of the bargain and let him decide how to spend his money. But I had also presented him with choices and thus made him consider the consequences of spending now vs. later.

For the first few months the money was always gone in no time, either for a piece of extra candy here or there, or for an Xbox game and so on. But slowly he realized if he played his cards well with me, he might be able to coax these things out of me instead of using his savings, which he could then keep for something more valuable. So, he had picked up another lesson and now was on his way to learning how to budget.

And as he progressed we sat down many times to calculate how long he must save for something he wanted. He started to evaluate options if for instance he spent 50% of his money and saved the other 50% every month, how long it would take to reach his goal. By playing with several variables, and of course changing his mind along the way, he slowly got into saving for the future. 

What my son had learned in the process was, that when he got his pocket money in cash it was tangible for him; he could see how much money he actually had and he was reluctant to spend it. However, when he transitioned from the piggy bank to a bank account, the money was no longer cash in hand. It became intangible. For him that was a big change. As a result, when using the much-desired bank card, he went on spending on it, as it was so cool to pay by card. But he had lost the sense of how much he was spending.

Invariably, learning to manage money without actually seeing it was the next step. How do you keep track of it and continue to save even if your money is not “real”? After some time and some moaning that it was impossible to do it in this way, slowly he got around to the idea. He had understood the value of fiscal discipline. Of course, the bank application and other useful tracking apps did help. And today’s children are extremely tech savvy. So let them use these gadgets to support learning skills that can actually impact the rest of their lives.

Being aware how many adults avoidably race towards a financial black hole for the same lack of impulse control that my little Tamás displayed when he was in his single digits, made me realize how desperately financial education is needed. Even basic fiscal control is so crucial that it should be a part of the core curriculum taught in every school to make sure youngsters grow into financially responsible adults that know how to handle their money wisely to avoid getting into debt spirals; something all too common these days. 

We need to understand that for our children the value of money will only ever be attained if we don’t completely spoil them buying everything they want on the spot. Caving in to most purchases requests means there is never a need to learn how to handle money. Instead, those children will just learn to ask mummy and daddy to get what they desire at any time. And as adults the ATM and credit card will replace the parental cash machine. Only with even less constraints, but more dire consequences. So, give your children pocket money, but also empower them with the authority and responsibility over it.