In a radio interview that went viral this summer, a privileged young woman going by the name of Kim confessed she had blown her college fund. Her grandparents, she said, had given her $90,000 to attend a school costing her $20,000 a year. But the money was gone, so she had no way of paying for her upcoming senior year. Kim said she spent the money on school clothes and other goodies: “I probably should have not done that. I took a trip to Europe.”
Kim blamed her parents. "...Maybe they should have taught me to budget or something," she said. "They never sat me down and had a real serious talk about it."
We can't tell whether Kim's story was a hoax or not. But the issue her interview raised is real: Most kids don't grow up to be financially responsible adults. So how can we ensure that our sons and daughters grow up to be financially responsible?
If you still have children living under your roof, the solution is plain: Give kids an allowance.
Kids who get an allowance tend to be more financially savvy than those who don’t. They score higher in a test of pricing knowledge, and they are less likely to mistake credit as a limitless form of currency.
We’ve both set up significant allowance systems for our kids. Candice has younger children (ages 7 and 10) and set up her system after reading Ron Lieber’s excellent book The Opposite of Spoiled. Christine’s children are young teens, and use a financial management system similar to her own. Here are what we think are the essentials:
1. Don’t just give kids money and expect them to grow up to be responsible financial citizens. If children observe money “appearing” whenever they want or need to buy something, it will be difficult to adjust later, when they learn that money doesn’t just appear in relationship to desire.
2. Don’t tie allowance to regular household responsibilities or weekly chores. We know this is controversial; most parents want kids to understand that in the real world, they only get paid when they work. But in households, this just isn’t true: Parents don’t get paid for the household chores they do. Families are built on mutual obligations—the ways that we help and nurture each other—not paid work.
Kids need to feel like they are a part of something larger than themselves. Giving them real responsibilities fuels this intrinsic sense of place and belonging. Research shows that kids who do unpaid chores are happier and have a higher sense of self-worth. But when we pay them to play a role in the family, we unwittingly kill their intrinsic motivation by providing a flashy external motivator: money. They often start to see themselves more like household employees...and “quit their jobs” when their allowance is no longer enough to motivate them.
Read next: Why You Need to Give Your Kid an Allowance
3. Talk about it. Money does not have to be the conversational third rail our culture has deemed it to be. As you are setting your kids up with an allowance, talk about why you are doing what you are doing, and what you hope they will learn. Make it clear that kids are expected to consult with you about their purchases.
4. Decide on an amount. Be very clear about what they will pay for with their own money, given their new income. Christine’s teens pay for what her family calls “necessities”: clothes, school supplies, personal items like toiletries, sports equipment, and phone bills. As such, Christine and her children’s father give them a fairly large allowance. The kids don't get an allowance for entertainment—movies, a concert, or music downloads. They have to do paid work to cover their non-essential expenses.
Candice’s kids, who are younger, get a smaller allowance—just enough to give them experience with handling the three main functions of money (see #5 below).
Both families’ allowances were calculated in the same way: We added up what the kids would need each week, given what we expect them to pay for. Then we added in a reasonable amount for savings and for charitable giving.
5. Create a very simple budgeting system. Give kids a concrete way to think about money by talking about it going into different “buckets.” Start with three imaginary buckets labeled Savings, Giving, and Spending. If children think money has only one purpose—spending—their outlook will be limited, as will their future bank accounts.
This budget should be age-appropriate, and in most cases, can be written on a sheet of paper.
6. Automate or routinize payments. Pick a day of the week or month and stick with it: Set a reminder on your phone or put it on the family calendar. Acquiring a healthy money mindset is easier with tangible objects (like dollar bills) than abstract numbers on a bank statement, so younger children need to physically receive real dollars for their allowance. Candice’s children receive cash each week. Christine’s older children use an online banking system. They get a text alert when their allowance is automatically deposited into their bank account, and they are required to categorize their purchases once a month.
7. Let them make mistakes—and feel the consequences. Kids need to own this money, and all the miseries or victories that follow. One of Christine’s kids spent her entire school supplies budget on locker decorations for middle school … before she’d purchased necessities such as paper. She cried and begged for more money. She didn’t want to bring used pens to school. She wanted a new thumb drive. In the end, she resourcefully prepared for school without her parents' help. This lesson was better learned with school supplies than, say, college tuition.
8. Give optional opportunities to make money. All kids need to experience the power of their initiative and the satisfaction of someone acknowledging the value of their work. So give them chances to earn money, or allow them to propose their own. Our kids are learning to watch for opportunities to do work around the house beyond their basic chores; this has the added benefit of increasing their mindfulness about what needs to happen for a household to run smoothly. If they see a need, they can propose a wage and engage in negotiation—yet another skill that's useful in adulthood.
It's important to raise children, especially girls, to see money as a renewable asset. Liz Perle, author of Money, a Memoir, talks about a gender difference regarding money: Women look at it as a lake which is finite, while men look at it as a river, constantly renewing. To give tomorrow’s woman a solid understanding of her earning potential, it’s important to give today’s girl the opportunity to be entrepreneurial.
One final note: Allowance isn’t the end-all be-all of our children’s financial education. But it's a good place to start the discussions and experiences that will lead to financial responsibility.
Read next: Do You Give Your Kids an Allowance?
A sociologist and senior fellow at UC Berkeley’s Greater Good Science Center, Christine Carter, Ph.D., is the author of The Sweet Spot: How to Find Your Groove at Work and Home (2015) and Raising Happiness (2011). Presenting the latest neurological and psychological research on positivity, productivity, and elite performance, she explores a sweet paradox: by doing less we can actually accomplish more. A sought-after keynote speaker, Dr. Carter also writes an award-winning blog.
Candice McGarvey, CFP, is the Chief Story Changer of Her Dollars Financial Coaching and Client Advisor for Lumina Financial Consultants. She believes in increasing a client’s financial wellness rather than just focusing on assets, and works with her women clients via conversations that feel more like a coffee date than a meeting.