May 19, 2007
Teaching Your Children About Money
Early Show Financial Guru Ray Martin On Allowances: What, When And How To Pay
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Play CBS Video Video Allowances For Your Kids "Early Show" Financial Guru Ray Martin shows us how we can engage our kids in the process of making, spending and saving money by giving them allowances.
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(AP/CBS)
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Special Report Ray Martin's Money Tips The Early Show money maven offers advice to keep your financial house in order.
But if you are paying an allowance in lieu of paying for some of your child's discretionary expenses, another way to decide on the amount to pay is to estimate the cost of the things your child will assume the responsibility for paying and give them an allowance based on that amount.
The way to approach this is to discuss your child's spending needs with them and work with them on a "spending budget" based on weekly or monthly expenses. After what will prove to be an interesting conversation, both of you will need to come to an agreement on the final amount. Use this as a guide for the amount you'll pay for the allowance. This process helps to develop budgeting skills, teaches responsibility and prepares them for the realities of personal money management.
How To Pay
Parents commonly pay their children's allowance one of three ways: as requested or needed; regularly as set periodic payments; or as a combination of the two. Giving money to kids on request for a day at the mall or to have some spending money on hand can add up.
The problem with this is that it's difficult to keep track and neither the parent nor the child has any idea of the amount of money that has changed hands over the course of a year. This also fosters money habits that in the future can lead to impulse spending problems.
Paying a set amount on a weekly basis sets the stage for money-management habits that are more useful in the real world. The child might more quickly learn that their spending has limits (sounds familiar) and that budgeting is important because there is no more money until the next "pay day."
It's also important to pay on time at a set schedule and to never miss a payment. One of the lessons that an allowance is supposed to teach is discipline, and as we expect to receive our pay on a set day, our children will expect to receive their allowance on their "pay day."
Finally, one of the lessons an allowance can teach that is particularly valuable for the real world is to use some of the allowance for spending, some for saving and some for giving.
For example, if you pay your child an allowance of $10 per week, you can work out an arrangement where they will set aside $2 for saving and $1 for giving, and use the remaining $7 for spending. This helps to teach the lesson of "gross pay" and "net pay" and saving for future expenses like a car or college. Don't expect these concepts to sink in right away, but if you stick to this approach, you will have laid the foundation for what they will deal with when they later receive income from work outside the home.
So to help sort this out, here are a few simple but important rules for paying allowances:
Allowances DON'Ts:
Pay for household chores
Pay for grades or school work
Hold back as punishment
Allowances DO’s:
Explain and set rules
Pay on schedule and on time
Allow for spending mistakes
A Real-Life Example
If all of this sounds too tedious — after all, who has the time to go to the bank each week, get cash and break out an allowance into small amounts for spending, saving and giving — then consider this real-life solution:
On a Saturday, I took my children to my bank and sat down with one of the bank's customer-service officers. I explained that we were there to open two accounts for each of my children — one for spending and one for saving/giving.
I wanted each of the accounts to be linked to my own so I could access all accounts and view them on one screen when I logged on to the bank's online banking Web site. I also wanted to have an ATM card for each of my children's "spending accounts," and I wanted the ability to set an automatic weekly transfer from my bank account to theirs to facilitate the payment of the allowance to their accounts.
The bank officer agreed, and after completing some paperwork, the accounts were set up and my children made an initial deposit of some of the allowance money that they brought with them to establish their accounts. After we got home, we logged on to the banking Web site, checked the accounts and assigned nicknames to the accounts for each child.
This arrangement really works well for us — we never miss an allowance payment and the kids can, with our permission and supervision, log onto their accounts and see how much money they have to spend or give and how much they have saved. When they need cash, we go to an ATM, use their card to access their account and make a withdrawal. This arrangement teaches them at an early age how to deal with money electronically and online — after all, that will be the way they deal with money and banking in their lives.
When To Stop
Parents often end allowances when the teen gets their first job. Many teens see getting "cut off" as a downside to getting a job, especially if their allowance was paid for daily household chores they are expected to continue performing.
Alternatively, spending-based allowances are viewed as a transition to independence that comes when getting a regular paying job, something that helps establish realistic financial expectations. Also, consider encouraging saving and investing by setting up an investment fund or account and offering to make matching contributions for each dollar contributed up to an annual limit.
However you decide to handle this, what you teach your children about managing their money will make a difference in their financial behavior for the rest of their lives.
© MMVII, CBS Interactive Inc. All Rights Reserved
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- if there wuz a bank that issued a billion bankbucks to each customer, and never altered that balance regardless of items bought or sold, wut then? get well soon feed the world bouquet trails instead of get sick soon tax the world bomb trails? why do we invest money in people who feed the world by making everyone pay for lunch? and why do we invest votes in people who stomp slavery by taxing everyone at gunpoint?
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- You are so on the money (no pun intended!), justfacts2!!!
When parents act like they can't live w/out TV in every room, the latest cellphone or gadget, then what's the kid learning? Parents complain about the price of everything, but drop thousands of $$ on cars, cigarettes, facials, club house memberships, beer, the latest fashion, etc!
I've never agreed with "giving" kids allowance. How does free money teach a kid to earn it? And sorry, but household chores don't count as "earning". Parents don't get paid to cook, clean, mow the lawn, make repairs, etc & neither should kids. That's the responsibilty one meets when being part of a family; it's a team effort.
That kids are allowed to eat the food in the fridge, wear the clothes in the closet, play with the toys that are scattered on the floor & in the yard is enough. If there's something beyond all the junk they get at christmas, birthdays or just because they're at the mall, then they can go OUT & earn it. If they're too young then they don't need anymore stuff!
Kids (& some parents) need to learn to be happy w/ what they have & lose the selfish "Gotta Have It" mentality that tells them life isn't complete unless they have more of what they don't really need.
Want to teach kids about money? Then show them the chequebook & let them help you do the math. Show them your paycheque & then show them the bills. Discuss goals & the difference between "wants & needs". Have them help with the household budget. - Reply to this comment
- This is a joke! How can parents teach their children about money when the majority of them don't know the value of a dollar to begin with! I am not talking about older parents. I am talking about the younger generation who can't even discipline their children let alone teach them the value of a dollar! Permissiveness seems to be the name of the game anymore when it comes to younger people raising kids. And no, I am not talking about spanking here. You can effectively discipline children without spanking. I guess that would just cut into their free time to be with their friends.
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Best-selling author Mitch Albom on his first nonfiction work since "Tuesdays with Morrie."
