(MoneyWatch) With kids heading back to school, now may be a good time to give them a lesson about money at home.
I am a big fan of paying an allowance. It's also one of the best ways I know to engage children in the process of making good spending and saving decisions. An allowance can be a great tool to build a foundation for sound financial behavior in the future.
But if you do pay an allowance, what is the right amount to pay? What do you pay an allowance for? How often should you pay and when should you stop?
Of course, not all families provide an allowance. The decision to do so depends on personal and economic circumstances. I also respect the choice made by some families to not pay an allowance. Since there seems to be a wide variety of thoughts and opinions on this issue, it's helpful to consider these things if you do provide an allowance or money to your kids:
Teaching big lessons with small money
One of the reasons to pay an allowance is to use it as a tool to engage children in the process of learning about spending, saving, and giving. Paying an allowance provides a way to get children involved and creates "ownership" of the decisions they make when it's with their own money. It's also important to look at an allowance as a tool to allow children to make some money mistakes. In fact, expect them to make some. In essence it is a way for them to learn big lessons with small amounts of money at an early age. It's better to learn from money mistakes earlier with small amounts of money than to learn later in life when the amounts involved can be much larger.
When to start
Most parents begin giving an allowance to their kids by age six to eight. But I say it's the aptitude not the age that really matters. When your child begins to understand that money can be exchanged for things they want, then you will know it's time to start discussing the concept of an allowance. Remember that money and paying for things is an abstract concept and some children will show an interest while others will not be so flexible. One of the benefits is that an allowance shifts the spending decisions from the parents to the children, particularly when it's clearly communicated that the allowance is provided in lieu of the parents paying for the discretionary wants of their child.
What NOT to pay for
It's important to be aware of the behavior that this transaction can encourage. For example, if you pay your kids an allowance for doing household chores then what happens when they later begin to earn more money from a job outside the home? Is the only consequence for not doing chores the loss of an allowance? Experts agree that the reason for doing house work is the fulfillment of each individual's responsibility as a household member, not an allowance.
Some parents think it's a good idea to pay for good grades, which after all, is similar to how many adults are rewarded in their working lives. Again, most experts agree that paying for good grades is not a good idea and that this can undermine the virtue of self-improvement. A better consequence of a lack of effort on household chores or schoolwork should be the loss of privileges, not the loss of an allowance.
It's also important to be consistent within the family. Paying a regular allowance to one child and handing over money whenever asked by another will foster different money habits between children in the same family.
What's the going rate?
Surveys indicate that for over half of those children who report getting an allowance, the going rate is $5 to $20 per week. This site provides results of an ongoing survey that lists children's allowance by age and gender.
The amount children are paid also increases with age. Start with smaller amounts with younger children and gradually raise the allowance each birthday. Amounts can also vary by the family's economic situation. Children from families in areas where living costs or incomes are lower may receive lower amounts. Family size also matters. Where there are more kids, it may be impractical to pay "the going rate" to all children in a large family.
If you are paying an allowance in lieu of paying for some of your child's discretionary expenses, a process to decide on the amount to pay is to estimate the cost of the things your child will assume the responsibility for, and base the allowance on the cost of these items. Approach this as a discussion of your child's spending needs and work with them on a "spending budget" based on weekly or monthly expenses. This will prove to be an interesting conversation and both of you will need to come to an agreement on the final amount. This process helps to develop budgeting skills, teaches responsibility, and prepares them for the realities of personal money management.
To sum it up, here are a few simple but important rules for paying allowances:
- Pay for household chores
- Pay for grades or school work
- Hold back as punishment
- Explain and set Rules
- Pay on schedule and on time
- Allow for spending mistakes