Banks Target Kids' Piggybanks

Allowances have been the time-honored way to teach kids how to spend, save and manage their money.

Now, observed The Early Show financial guru Ray Martin on Wednesday, financial institutions are in on the act, creating programs and tailoring their account options, hoping to land the loot stashed in your child's piggy bank.

Allowances for Children: What to Pay and Where to Bank It

It's estimated that American parents give their children more than $1 billion a year to spend.

If you have children, you've probably confronted the issues of providing money or a regular allowance to your kids, and how doing so can help them to learn to manage their money.

But just providing an allowance is not the complete picture: Today, kids need to learn how to manage the myriad of banking services and products provided by the financial services and banking industry, and how to discern which products can help them, and which can hurt them.

Strictly defined, an allowance is a sum regularly provided for personal or household expenses. Children have their needs and wants, and some of those cost money. According to a survey a few years ago by Ohio State University, about half of the 9,000 teenagers polled reported getting an allowance.

Of course, not all parents and families provide an allowance. The decision to do so depends on personal and economic circumstances. There seems to be a wide variety of thoughts and techniques on this issue.

Here are a few tips if you do decide to provide an allowance to your kids:

When to Start

This is a tough one for many people. Most parents begin giving money to their kids by age 5 or 6. The right time is not necessarily when a child reaches a specific age. When a child shows both an interest in an understanding of the concept of money — that it can be exchanged for things they want — then he or she is ready to start learning the basics of money management.

An allowance is a great tool for teaching these important life skills. The idea is that teaching a child to manage their money and learn the costs of things they want to buy will help them become more independent in managing their spending and finances. Also, an allowance allows for children to make mistakes with money when the cost of doing so is minimal, and to better appreciate the things they buy when they use their own money.

What to Pay For

Reasons often given for paying an allowance range from picking up a room to getting good grades. Personal choice will decide what to do. However, it is important to be aware that this financial transaction can encourage certain behavior. For example, if you pay your kids to pick up their room, what will be their behavior when they are not paid to do so?

On the other hand, paying for good grades is consistent with the way most adults are rewarded in their working lives. It's also important to be consistent from one family member to the next. Paying a regular allowance to one child and handing over money to the other child will foster different future money habits between children of the same family.

Some parents do not provide allowances because they pay for the child's activities, transportation and other extra expenses. If that is what you do, then it's a good idea to explain this to your children to let them know that the expenses you pay for them replace an allowance. Some parents even pay an allowance to their children and then take a portion of it back in the form of "household taxes" to use for these expenses.

Consider paying a job-based allowance for good grades, extra household jobs, things you would have paid someone else to do for you (wash the car, mow the lawn, shovel snow, etc.) It's typically advised to avoid paying an allowance for cleaning or picking up, or any chores that are expected to be shared by all of the family members who live in the household.How to Pay

Parents commonly pay their children's allowance one of three ways: as requested or needed, regularly as set periodic payments, or a combination of the two. Giving money to kids on request to blow at the mall can add up. The problem with this is that it's difficult to keep track, and neither the parent nor the child has an idea of the amount of money that has changed hands over the course of a year. This also fosters money habits that can lead to spending problems in the future.

Paying a set amount on a regular basis helps set the stage for teaching money management skills that are more useful in the "real world." The child would more quickly learn that his or her spending has limits and that budgeting is important because there is no more money until the next "paycheck" — a real-world fact for most adults.

What's the Going Rate?

The OSU survey indicated that $50 a week is the median amount received by teens who get an allowance. The amount children get is highly affected by their family's economic position: Children from families with incomes of $20,000 or less get $12 to $14 a week and those from families with incomes from $30,000 to $40,000 get $21 a week. The survey also indicated that children from families with incomes over $100,000 receive an eye-popping $175 a week!

Parents can take comfort in this statistic: About 51 percent of the nation's teens do not receive an allowance. Use this to quiet your teenager's protests. A quarter of those who do get an allowance receive $7 or less a week. Family size also matters: Where there are five or more kids, the median weekly amount drops to $23. Parents often pay an only child more, one of the perks of being an only child.

One technique for deciding what to pay is to discuss your kids' spending needs with them. Make a list of the costs of the things they are expected to pay for with their allowance. Ask them to present a "spending budget" based on weekly or monthly expenses. After that conversation, agree on the final amount that will become their allowance. Use this as a guide for the amount you'll contribute. This process helps the child develop budgeting skills, teaches responsibility, and prepares them for the realities of personal money management.

Getting Cut Off When Getting a "Real Job"

Parents often end allowances when teens get 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 duties they are expected to continue to perform. But when a job for which an allowance was paid, such as mowing the lawn or babysitting, is replaced with a job at a store in a mall, it is viewed as getting a promotion to a job that pays more money.

Banking an Allowance

Banks and brokerage firms, from Wells Fargo to Charles Schwab, have rolled out programs to help teach kids about managing money. Now, a growing number of financial institutions are rolling out more products and services targeted to pre-teen savers.

There are several likely reasons that banks and financial institutions want to grow their market share of pre-teen savers. First, getting a customer early in the lifecycle of savings is an opportunity to build powerful brand loyalty; after all, most of us still fondly remember the bank where we had our first passbook savings account. Also, pre-teen savings accounts and services can often lead to new or deeper relationships with the rest of the household's members.

A few years ago, it seemed that there was a dearth of banking products designed for small depositors, other than the traditional passbook savings account. Simply put, this was not on the radar screen of the banking industry.

Today, financial services firms are launching a number of services to get young savers and their parents interested in stashing their money in the bank. A few products recently launched include: