Everything you need to know about giving your child an allowance

To give or not to give is the question. Parents in India are divided over the issue of giving an allowance or pocket money to their kids. On one end of the spectrum, the skeptics see children getting spoilt with all the pocket money they are getting. On the other, some parents believe that giving allowance to kids and making them accountable for how the allowance is spent, makes the children financially disciplined. Which school of thought is correct? Here is our take on this eternal question.

At the risk of over-generalizing, Indian parents are rather protective of their children. We pay for their undergraduate college tuition and in some cases even postgraduate college expenses. Contrast this with the US, where most students take a loan to pursue a college education. When you have a loan to pay back, it is easy to become responsible fast. However, in India, the kids are carefree and cocooned from the realities of life till they become adults. While there is merit in insulating kids from the vagaries of life, there is a significant downside to this as well. The kids grow up unaware of several life skills, personal finance being one of them.

Another interesting difference between the western worldview and the Indian one is regarding part-time work by high school students. In the US and other developed countries, high school students, including kids of wealthy and powerful folks, engage in part-time work waiting in restaurants, bagging groceries, and so on. However, the Indian elite looks down on work of such nature.

Maintain a journal

All things considered, it is a good idea to introduce the concept of pocket money or allowance to children. If you are worried as to how the money will be spent, start with really small amounts of pocket money. The key is to make your child maintain an allowance journal. An allowance journal will have a record of all income and expenditure. Whether these are gifts from grandparents or regular allowance from parents, everything goes into the journal. The journal should also be used to record every expense, however small, along with the date of the expense.

Why is this important? This helps the children account for their expenses, something that even adults find challenging. When they start accounting for their income and expenses from an early age, children grow up to be financially disciplined adults. They don't end up wondering where all the money went.

How often to give?

Most grown-ups receive a regular income at the beginning of the month. It would be a good idea to mimic the salary by giving an allowance every month. The predictability of cash flow will also help the children in developing the habit of setting long-term goals and saving up money for such goals. Once again, such habits will help the child when he/she grows up.

Fixed or variable?

It is better to give a fixed regular allowance as long as the children demonstrate the ability to maintain an allowance journal regularly. If they are irregular in this, the allowance can be reduced till they get the allowance journal in order.

How soon to start?

I have seen children as young as seven years old handle regular allowance and maintain an allowance journal. In the process, they learn the concept of scarcity. Money is limited, while our wants are unlimited. With time, such children who were exposed to regular allowance start prioritizing their expenses based on their needs and wants. In short, over time, they become financially savvy.