Mum, can I get a new Fortnight Battle Pass? Dad, the Lego Millennial Falcon's on sale!
My kids are always at me to buy this or buy that. I'm forever fending off these requests with phrases like, wait for your birthday, digital content is just a waste of money, or that might be only $20 today but that's the start of a slippery slope to excess spending.
I realised long ago that I was controlling the decision making on spending money and applying my values onto my kids without intent.
So how can this be remedied?
Enter: Pocket money!
What’s the Real Intent of Pocket Money?
Pocket money isn’t just about giving kids spending cash, it’s about building lifelong habits for their future financial success. Birthday cash from Grandma is a start, but I believe this builds the wrong intent on its own. They receive a lump sum (small as it might be) and we encourage them to spend it all so they can tell and show Grandma what she got them. On the other hand, pocket money simulates a real world construct of frequent small expected payments based on agreed tasks with rules and expectations. If they complete their agreed jobs, and perform them up to the necessary standard, they will receive an agreed amount of money in return. Fortunately, or unfortunately, we are introducing them to the employee/employer relationship, but in a loving caring environment that may not be the reality when they hit the real workforce.
Once earned kids are then exposed to the idea that money is a limited resource, and what they choose to do with it has consequences. Will they spend it all on snacks? Save for something bigger? Donate some? Invest even? Small decisions that mimic the bigger financial choices they’ll face as adults.
How Much Should They Get?
My approach is to tie it to chores. Small amounts, but task based rather than a real world hourly rate. Say $2 a week for a small daily task like feeding the dogs. $5 or $10 for a large one like mowing the lawn. For the daily tasks it gives the opportunity to discuss unit based remuneration, like 25c per occasion, and a salary type of scenario of $2 per week. The larger tasks can be framed around an hourly rate, say mowing takes 1hr, so $10 per hour for the task, but it can only be done when there is 'demand' (grass grows long, and is higher in summer and lower in winter).
Remembering the goal at the end of the day is to give enough for them to make meaningful choices, but not so much that they can buy everything they want.
How Does This Compare to Minimum Wage?
According to Australian Fair Work Ombudsman "As of 1 July 2024 the National Minimum Wage is $24.10 per hour or $915.90 per week". However, this is only part of the story. Junior rates (under 21 years of age) apply, and vary by industry. For some real examples:
- Dominos and KFC employs workers under the Fast Food workers award, with rates for Under 16's @ $12.83 / hr
- Woolworths and Coles Under 16's $14.43 / hr
So, $10 / hr for young ones, who likely need some assistance for larger jobs is actually quite reasonable.
What Chores are suitable?
| Cleaning | Cooking | Gardening | Pet Care | General Tasks |
|---|---|---|---|---|
| Dusting | Cooking | Gardening | Feeding pets | Folding laundry |
| Tidying room | Set Table | Watering plants | Bath pets | Loading Washing Machine |
| Vacuuming | Loading Dishwasher | Pruning plants | Fill up Dog Water | Collecting Mail |
| Emptying Bins | Wiping kitchen counters | Raking leaves | Brushing pets | Tidy mud room |
| Wash dishes | Preparing lunch/snacks | Planting new flowers | Cleaning pet bedding | Unpack Schoolbag |
| Wash car | Meal planning assistance | Mulching garden beds | Organizing pet supplies | Clean windows |
How Does Pocket Money Grow into Financial Literacy?
Building habits takes time and repetition. This remains true for financial habits.
It's about helping kids to personally engage with financial realities. When they want a new toy but have run out of money they realise money is not infinite. When they see their savings balance increasing, they can see the potential for what they may do with the money and be encouraged to save more.
The key areas of focus are:
- Delayed gratification: Learning to wait and save instead of impulsively spending
Basic budgeting: Understanding how to plan spending and make thoughtful financial choices
Earning vs. spending: Realizing that money doesn’t magically appear, but if they are willingness to put in the effort, they have the opportunity to earn more
Prioritisation : Making choices about what is most important given the options
How to Let Them Make Mistakes
I can't say I have perfected this just yet! Conceptually I see the value in letting my kids blow their pocket money on a pointless toy, and hoping they will regret it. Even with the best intentions to allow them such unimpactful financial mistakes I tend to end up stepping in and overruling their choice. When I do it well, I ask them to take a photo and we will have a think about it. Depending on how strong my feelings are regarding the poor decision, I will usually go back to them in a few days later and show them the photo and discuss whether they still want the item or not. Sometimes they don't need a reminder, and this in itself brings some satisfaction that it is truly something they want, rather than the more often instant but fleeting fascination with an object. Guidance is what I should be striving for, talking through my thoughts and reasoning but not expecting the child to agree with all my perspective. Small regrets are an important part of the learning process.
Where Does Investing in Stocks or Savings Accounts Come In?
Back before it was banned, my first child had a Dollarmites account. We closed it not long ago and found that $30 had been saved with $4 interest earnt. Not something that I can promote to a child. Since then, we instead setup a transaction account linked to a savings account. The savings account has some rules around it, like interest is only earnt if the balance grows by $1 each month and no money is withdrawn (the promotional material makes it sound like it's this way for the benefit of the youth saver, but reality is it's in the best interest of the bank to save on some interest, maybe a story for another day). So here we are with $300 birthday money placed into a savings account, adding $1 of pocket money each month and earning just above the cash rate, or approximately another $1 per month. Come the end of the year there is $324 in the account, again hardly a promotional story for a kid.
How about stocks? Not sure how I am to explain all I know (and don't know) about the stock market and investing to a child without putting them to sleep, such as: need for diversification, short and long term tax implications, dividend reinvestment schemes, ETF vs Mutual Fund vs Stock, etc. What I can do however is teach them the value of long term investing. Let's not make them earn the money, this is not needed for this lesson, nor express that long term really means retirement, but gift them say $1,000 when they are 10-12 years of age and buy a highly diversified low cost ETF. By the time they become an adult they will see that it's value has doubled. Hopefully this helps them see first-hand the value of investing long term.
To open a kid’s investment account in Australia, start by choosing a broker that supports minor or informal trust accounts, such as CommSec, SelfWealth, Pearler Kids, Superhero Minor Account, or Stockspot Kids Account. The account is created in the parent’s name “as trustee for” the child, requiring the parent’s ID and the child’s birth certificate (adding their TFN helps with tax efficiency). Once set up, link a bank account, fund it, and invest in a diversified ETF or shares. Until the child turns 18, distributions are taxed under the trustee’s TFN, but when they reach adulthood, the holdings can be transferred into their own name via an off-market transfer—no selling required.
If you want to learn more about investing, I would highly recommend Passive Investing Australia. Spend a couple days/weeks reading through all the content and make up your own mind what you believe to be the right cause of action for you.
Early Budgeting
Keep it simple. Encourage splitting pocket money into spend, save, and give categories to help kids grasp budgeting early on. Don't forget to ensure they set aside a portion for bigger goals. We now have created the foundations of adult financial planning.
Final Thoughts
Pocket money is more than just spare change, it’s a powerful tool for shaping financial habits. By using it as a learning experience, rather than just a weekly allowance, we can set our kids up for financial independence, good money habits, and maybe even a future of smart investing.
How do you approach pocket money? What would you do differently to my suggested plan?
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