Allowance: Cash or Digital?
In my previous post, Paying Kids to do Their Chores, I explored the pros and cons of tying your child’s allowance with jobs around the house. Regardless of which side of the debate you fall on, there’s another big allowance question that many parents have these days: do you give your kids cold hard cash or pay them digitally through a mobile app?
If there’s one permanent change we can expect to see from the pandemic, it’s the increased use of mobile apps to do everyday tasks like ordering food online and basic banking transactions. In this era of hyper germ awareness and contactless everything, the use of cash has declined precipitously. At the same time, cash continues to be the foundation for almost every financial literacy program for kids these days, and learning to tell the difference between a penny, a dime, and a quarter is one of the first lessons kids experience around money.
Why do we focus so much on cash when the future of money is digital?
There’s a valid argument for both cash and digital. The physical nature of coins and bills creates a tactile experience that you just can’t get from an app. Psychologically speaking, it’s a lot more painful to hand over a $20 bill than it is to swipe a card for a $20 purchase. Research has shown that people notoriously spend more money if paying with a credit card or debit card compared to cash (12%-18% more according to a study by Dun & Bradstreet).
I firmly believe in the value that physical money adds to the learning experience for kids. Financial concepts such as earning, saving, and responsible spending can be complicated enough for kids to grasp when they are really young, but having the ability to physically experience money creates stickier memories. Being able to see their piggy banks or savings jars fill up over time is a daily reminder of their progress.
Personally speaking, my kids love emptying out their savings jars to count how much they have, or to pull just a few dollar bills out of their “spend” jar to put in their purses and take with them to the store when we are running errands. However, my kids are still young (6 and 8) and we are nearing the age when it will be time to start introducing more digital concepts.
The benefits of digital go beyond just preparing kids for the future and what will inevitably be a digital-everything adulthood. One of the most enticing reasons to go digital is the ease and convenience of being able to maintain consistency with your kid’s allowance without having to remember to go to the bank to get cash. (Is there any other reason to even go to the branch anymore?) With an app, allowance can be as easy as setting up automated transfers to whichever digital platform your kids are using. In addition, there are many useful apps and tools available today that bring financial literacy and money management skills for kids to a level that most parents just don’t have the time for or patience to teach on their own.
Goalsetter is just one example of an app that’s bringing money management and financial literacy concepts together with a focus on saving for specific goals. The accompanying debit card even comes with financial literacy quizzes that kids have to take in order to unlock the card so it can be used for a purchase. I think this is a great way to reinforce basic concepts around saving while also bringing awareness to every transaction and helping kids avoid mindless spending.
Rooster Money is another app that’s more specific to paying your kids an allowance digitally but also has a focus on financial literacy concepts such as setting goals and saving money in different buckets. Rooster Money also has a premium offering (Rooster PLUS) that helps kids learn the power of compound interest by setting an interest rate and helping them grow their savings even faster.
In my opinion, I think there can be a healthy balance between digital and physical when it comes to money and kids. I also think your child’s age and his or her unique personality and relationship with money will play a key role in deciding which method is better for you and your family. Maybe you start them out with cash when they are young and switch to digital when they get their first tablet or phone. Or, if you know you have a spender on your hands, you can use a digital app to track their savings but help them withdraw cash for any purchases they want to make to help bring more awareness around how much they spend.
Regardless, it’s important to remember that earning an allowance is all about planting the seeds of responsible financial behaviors. Having a visual reminder and a convenient way to track their money on a daily basis will help solidify those concepts and create a foundation for a healthier relationship with money well into adulthood.
As I always say, the most important thing when it comes to giving your child an allowance is consistency. Whichever method you choose, stick to it and create a system that’s reliable and predictable for your kids so they know what to expect, when to expect it, what they have to do to earn it, and what they should do with their money once they have it.