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Teaching Your Children About Money

Most families with children pay them an allowance. I am a big fan of doing this, as it's one of the best ways I know to engage children in the process of making spending and saving decisions.

It's also a great tool to teach responsible spending and saving actions that can build the foundation for sound financial behavior in the future. But if you do pay your kids 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 parents and families provide an allowance. The decision to do so depends on personal and economic circumstances, and I respect the choice made by many 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

Strictly defined, an allowance is a sum of money regularly provided for personal or household expenses. Let's face it: We all have needs and wants. Kids have theirs — and some of those cost money. According to a 2005 report by research firm Yankelovich, about 58 percent of the children surveyed reported getting an allowance.

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 they're using their own money.

It's also important to look at an allowance as a tool to allow children to make some money mistakes — and you have to 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. My view is that it is better to make mistakes earlier with small amounts of money than make mistakes later in life when the amounts involved can be much larger.

When To Start

This is a tough one for many people. Most parents begin giving an allowance to their kids by age 6 to 8. It's not the age but rather the aptitude that matters — when your child begins to understand that money can be exchanged for things he or she wants, 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; some children will show an interest while others will not, so be flexible.

Also, paying an allowance will give children and you more control over their money — if you don't pay an allowance, they may still get money out of you for the things they ask you to buy for them anyway.

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 To Pay For

The reasons some report for paying an allowance range from pay for picking up their room to getting good grades. Ultimately is a personal decision — but before you decide, it is 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 reward for doing chores is the fulfillment of each individual's responsibility of being a member of the household, not an allowance.

Some parents think it's a good idea to pay for good grades, which after all, is similar with how most adults are rewarded in their working lives. Again, most experts agree that it's not a good idea and that it can undermine the virtue of working hard to improve oneself. 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 of the same family.

Parents whose children express concern over not getting an allowance can find this useful: About 42 percent of the children in the Yankelovich survey reported that they don't receive an allowance. The reasons parents do not provide allowances includes that they provide generously for sports, activities, transportation and other expenses. If this is your decision, it's a good idea to let your children know that is in place of an allowance.

What's The Going Rate?

The typical advice is either $1 per week for each year of age, or 50 cents per week for each year of age — though neither of these rules are of much help.

The Yankelovich survey indicates the following results for ranges of allowance amounts paid:

  • 42% receive nothing
  • 8% receive less than $5 per week
  • 19% receive $5 to $9 per week
  • 17% receive $10 to $19 per week
  • 9% receive $20 to $49 per week
  • 1% receive $50 or more per week

    This indicates that for more than half of those children who report getting an allowance, the going rate is $5 to $19 per week.

    The amount children get is affected by their 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 smaller 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. The point is that there is no hard and fast rule here.

  • 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.

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