I still remember my Dad gathering us around each week for pocket money, recording our withdrawals and deposits into his diary. There was never a lot to record in my ‘savings’ column as the one thing I’ve always excelled at is spending. Despite this, pocket money taught me a lot about how money works, what it feels like to achieve a savings goal and – most importantly – the consequences of being in debt.

My own kids approach to money is a real insight into their personalities. Miss 10 is a saver. She loves to accumulate and count her riches. She struggles with spending money and every purchase is well thought out. It’s amazing this child is related to me.

Miss 8 is a spender. She’s decisive and knows what she wants. Mr 8 is, well, unique. He forgets to spend. He forgets where his wallet is. Heck, most days he forgets to put socks on.

Teaching your kids about money – how to spend it, save it and share it – is one of the best gifts you can give, especially in today’s I-want-it-now world full of easy finance options. So here’s my guide teaching financial literacy through pocket money.

Make it a learning experience

Treat pocket money as a chance to teach how money works, rather than as a reward for chores. It’s way too easy for a child to declare they don’t want their pocket money and so therefore won’t do their chores. Not only does this leave you with more chores to do, it’s not something that works in the real world with a real job and a real boss.

Make pocket money their right and create another reward system based on things like play dates, sleepovers or treats, to manage the chores.

Give them freedom

Let them make their own decisions and their own mistakes now while the stakes are low. Making a bad decision to spend $10 on a useless toy that breaks within minutes now is better than decidingto spend $10,000 on a bad car that breaks down within weeks later on.

Spend, Save, Share

Each week pocket money gets split between what they’ll spend, what they’ll save and what they’ll share. At first it’s a great idea to have jars that the money goes into so they get the thrill of counting it each week and watching it grow. As they get older you can swap the spending jar for their own wallets and the saving jar for an app.

Spend – let them use this money to be frivolous. Don’t put too many rules around what they can and can’t spend on – it’s their money, their decision. It will mean biting your tongue while they combine their money to buy the biggest back of lollies every put on this earth, or pump coins into some arcade machine only to end up with nothing in return – but they’ll never understand what a “waste of money” is until they experience it for themselves.

Save – make sure they know what they’re saving for as this makes it much easier to put money aside each week. It’ll also give them a sense of satisfaction when they achieve their goal, rather than the thrill of a random, impulse purchase. The excitement will mount as the money grows and they’ll start saving more than they spend to achieve their goal more quickly. A well-timed trip to the shop, or visit to a website does wonders for re-focusing on a savings goal.

Share – is for donating to a cause or charity. If you have more than one child, they can have individual jars or combine all the share money into one amount. At the end of each term, have a discussion about which cause or charity the share money will go to – which is a great opportunity for you to pass on your own thoughts and beliefs.

Always Pay On Time

Set Pocket Money Day in stone. Put it on the calendar. It’s as important to them as your payday is to you.  For me this means annoying the staff down at the bank once every term with my demands for a few hundred dollars in very specific sets of coins. But once it’s done, it’s done.

Pocket Money Day in our house is Thursday so the wallets are full of spending money for the weekend. As kids get older you can change ‘pay day’ to earlier in the week so they need to learn to budget in order to have money left for the weekend.

When to start

Start pocket money when they start school as that’s a time when they are experiencing more freedom and independence, and will coincide with them learning about money at school.

As a rule of thumb, pay them $0.50 for every year of their age – Miss and Mr 8 get $4 a week and Miss 10 gets $5. This adds an extra level of excitement to birthdays as it’s the day when they get a pay rise.

There will come a time when this formula won’t work – I can’t imagine Miss 15 surviving on $7.50 a week. That’s when it’s time for them to supplement their income with a job (inside or outside the home) or discover their inner entrepreneur.

Teaching about debt

Pocket money is a great way to shut down all those ‘I want’ conversations with two simple sentences: either “OK, do you have enough money in your wallet for that” or “Great, maybe that can be what you save up for next”.

Whatever happens and regardless of how many tears are cried DO NOT lend them money – at least not until they have a good savings track record, and are old enough to understand more complex concepts like repayment plans and interest payments.

Ensuring kids learn good money management is one of the most important lessons you can teach for two reasons. Firstly it will help them make good Life or Debt decisions, and secondly it’s important to remember these are the people who will be supporting you and perhaps even making financial decisions for you in the future.

Update: ready to take it to the next level? Read my blog post on why you should lend your kids money.