Let’s talk money: How to best introduce pocket money in your financial parenting journey?

According to recent studies, a great deal of children grow up not knowing how money is earned or managed. In their daily adult life, a lack of financial skills can lead to unnecessary stress that is entirely preventable. Teaching money skills to your children is as important as learning to read and write or brushing their teeth. We talked to Dr Mara Catherine Harvey, CEO of VP Bank (Switzerland) Ltd and Head Region Europe, and founder of SmartWayToStart.com, about pocket money and embarking on your financial parenting journey. Happy Reading!

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Mara, on your website you describe your passion project: Financial Parenting. Please share with us why this project is so important?

My personal reflection on financial education started with my book “Women and Risk: rewriting the rules”. As a wealth management professional, I asked myself the question “What influence does a pay gap have on women’s wealth creation over a lifetime and what are the real risks women are facing?”. I could not find sufficient research to answer my questions, so I asked for simulations from our inhouse experts. The resulting figures were shocking.

That was the beginning of my journey in helping people, especially women in financial matters. It turned out there are still today unconscious biases, gender inequality - girls being socialized differently than boys from an early age, and later becoming hesitant to stand up for themselves in questions of salary and self-worth. Hence, women do not engage in long term financial matters as much as men do, it turns out that women are also less confident in talking about money.

The next question was, where do we start?

Our research on financial confidence began to focus on 3 dimensions:

awareness,
expertise,
and trust.

Where does the conservation start?

Research shows that confidence is shaped by the age of 5 and adult money habits are largely defined by the age of 7. It all comes down to building a skill set for life. We must explain that “money doesn’t grow on trees” and “money in a piggy bank is great but cannot grow”. So, we need to teach children to earn before we teach them to spend (we often do the opposite!) and we need to teach them why they need a savings account, explaining the concept of interest rate and compound interest.

In Switzerland, which is one of the leading financial places in the world, roughly 4 out of 10 adults do not fully understand basic notions of interest, inflation and risk diversification. There is a gender lens to it but there also is a generic question of financial literacy and the role parents have to play for this to improve.

Basic financial education is – and must be - in the hands of parents. We often think that this is a subject that needs to be treated at school, but this isn’t how it works. Before entering school, children need to have learned basic money skills. Children learn by observing their surroundings and they observe their parents handling money on a daily basis. So, parents are the real role models. Teachers at school teach them maths, languages, and other skills but teachers do not interact with money in front of children.

Our money choices impact our everyday world; we need to equip the next generation with the skills they need for the future
Dr Mara Harvey

What are the do’s and don’ts when starting out on a financial parenting journey?

I would break this question down to some simple rules:

Children need the tactile experience; this is how they learn. When teaching them money, digital money is like fast finance … we do not feed our children fast food, so why should we teach them only fast finance? Fast finance reinforces the one message we want to avoid: instant gratification.
As a parent, be clear about your goals and be the role model your child needs to learn good money habits.
Explain to your kids how money works: what a child sees today does not give them a full understanding of how money actually works.
Focus on the skills a child needs, in the right order: earning first, then saving, then spending. One of the biggest mistakes in financial education is that parents tend to teach their children how to spend money before they teach them how to earn it.
Make your kids understand that money is not just a gift or a treat. Having them earn it makes them value it much more than just handing out a weekly allowance. This defines their attitude towards money as they grow.

Don’t avoid talking about money because it is convenient, and you think that kids should be kids and not be confronted with such complicated topics.

In this article we want to share more info on the subject pocket money for children

When I started my journey developing my financial parenting programme, I quickly realised that there wasn’t a lot of research on the subject, nor meaningful guidance and tools for parents beyond superficial tips. So, I really had to dig deep and figure out how all the dots connect, why there is such a strong link between learning early money habits and later money behaviour.

Children should be given opportunities to learn to earn and manage pocket money. This helps children learn the value of money, the importance of saving, how to budget before spending, and how to avoid common mistakes, which are crucial skills for their future financial well-being.

How should children be given pocket money/allowance?

My book series “Smart Way to Start” aims to explain the right money habits. Pocket money (weekly or monthly) should never be a treat or a gift. We need to teach our children where money comes from. If we don’t, it is like building a house without a foundation.

As mentioned earlier, children learn about money from a very early age. They pick up on their parents' feelings about money. It is in childhood that we establish our attitude to money. Take saving: learning to save (delayed gratification) is a key life skill. It needs to be practiced to become a habit. It is the same process as learning to brush your teeth: it needs to be an everyday action. You have to repeat it with your children until it becomes a habit, and it takes years.

At what age would you suggest parents can start introducing pocket money?

I suggest starting as early as possible. It is important to know that young children need to learn the concept of letting go (of a toy for example) and sharing it with others. They need to become aware of the separation process - this is the same with money. Children need to learn that when they spend their money on something, they are physically giving something away and that money is gone when they part with it.

According to a child’s age, could you give any guidelines as to how much pocket money it should be given?

Often parents are given recommendations to give a child in first grade EUR 1 per week, second grade EUR 2 and so on. I disagree with this approach. It teaches kids that money is a weekly gift, that it is for wants (not needs) and it correlates with their age. None of those money messages are healthy.

I rather recommend to define small paid chores you are willing to pay your child to do (not things you expect them to do anyway) and allow them to practice earning a penny or two.

Start early! Research shows that after the age of 7, if your money habits are not well learned, it will get more and more difficult and the beginning of a lifelong journey with bad money habits.

Any other tools or concepts you would like to share with us?

Parents need to get off autopilot. The Digital money tools we all use on a daily basis, without even thinking about it, are terrible learning tools because our children cannot grasp the abstract process behind them. Moreover, these tools, as well as social media, focus on instant gratification. The good old piggy bank is an excellent learning tool. I often tell parents to get a piggy bank for their children, but also one for themselves to set a good example.

Parents should not make the unconscious mistake of treating girls differently from boys when it comes to pocket money. Boys often get the job of washing the car at the weekend and get 20 bucks for it. Girls are often asked to wash the dishes and get nothing. Unfortunately, there is still a big gender gap.

Are their resources to enable parents to have easy money conversations?

To start teaching children about money, we need to talk about it. I developed a course and tools for early childhood money conversations that focus on little girls but is also applicable to boys. I wanted to make it fun and easy to talk about money. I wanted to find a way to help parents have simple money conversations with their children. This is why I wrote a book series and created a masterclass for parents.

One of the most important skills that children need to develop to manage money wisely throughout their lives is delayed gratification. It sounds easy, but it isn’t. It takes a lot of practice and, interestingly, reading out loud to your child allows them to develop the “executive functioning” that is at the heart of self-control and delayed gratification. This is why I have written good old-fashioned books about money. The "Smart Way to Start" book series is for children aged 5-10 years. They are fun to read, all in rhymes, and delightful to look at with their beautiful watercolour illustrations by World Illustration Award Winner 2020, Mariajo Ilustrajo

I strongly believe that we need to start talking about money early in our children’s lives. We should not only teach our children how to earn money, but also how to spend money in a sustainable and ethical way. Our money habits shape our world.
Dr Mara Harvey

Websites

Masterclass (financialparentingworld.com)

Smart Way to Start

Would you mind sharing a few quick tips in relation to healthy money habits for our children?

Teach your children delayed gratification versus instant gratification.
Be a role model when it comes to earning, saving and spending habits.
Teach them, to earn money before they spend it.
Turn off your autopilot. If your children don’t see and understand what you are doing, they cannot learn.
Repeat, repeat, repeat. Learning money skills is a process that needs repetition.
Read out loud. It is scientifically proven that reading out loud to your children develops their social and emotional skills.
Teach your children how to plan and take action. Children can understand causality from the age of 3, so teaching them the ability to plan will develop their executive functioning.
Take time for money conversations about your/their have, needs and wants.
Explain to your children how a bank works: money has to go into your bank account before you can spend it, save it so it can grow or work with it.
Discuss with your child where your money goes when you spend it: we can decide the impact we want our money to have on our world.