| | | | Using an Allowance to Teach Money Management |
By Kat DeLong 
Whether it’s $1 per week to sustain your five year olds Hot Wheels habit, or $20 per week so that your teenager can buy new clothes, allowances have long been a staple of family life. Parents often use them to get their kids to do chores or to stop them asking for extra money, but here is a plan to use an allowance to teach your kids valuable lessons in money management.
It is not always a good idea to tie allowance money to chores. It is best to keep these as two separate issues. Children should be expected to contribute to the family by doing regular household tasks whether they receive an allowance or not. Allowances may be given as a method to teach children proper ways of handling their finances.
Even young children can learn to manage their money. Kids quickly learn that in exchange for a few pieces of green paper they can receive a coveted toy. Each family must decide what the proper age is for each child to being receiving an allowance. The month when the child enters kindergarten is a popular benchmark.
Allowance amounts should vary with the age of the child and the expected uses for the money they receive. Young children can receive a small amount that will be used to buy toys and other items that are not considered “necessary” by the parents. Older children should receive the amount necessary for them to purchase clothes, makeup, music, and anything else that the parent decides they should be responsible for buying. In either case, once the child is receiving a regular allowance, parents should require them to budget their money and not be expected to make these purchases for them. This method works well in eliminating the “gimmies” that many children experience when they are in a favorite store.
It is a good idea to pay allowances bi-weekly or monthly. In the adult world, people must budget between paydays and this is good practice for saving. It is also easy to forget to pay allowance on a weekly basis, and consistency is key when you are teaching kids to manage their money.
Once you have determined how much a child should be able to spend in the given period of time between allowances, double it. That’s right, double it. For example, if your ten year old receives $20 to spend on the first of every month, give him $40 as an allowance. He can put $20 aside as spending money, $15 into savings and $5 into a charity account. Envelopes or jars are a good way to hold onto the savings and charity monies until they are deposited. Once the savings money has reached a certain amount, say $100, take the child to the bank with you to make a deposit. This way, they can see how regular savings can grow into a substantial amount.
Once a year, sit down with the child and determine how their charity money should be distributed. As much as they might want to, kids are not allowed to be their own charity. Look for an organization that interests the child, whether that is an environmental organization that is saving animals, or a local charity that helps the homeless. The key is to let the child decide where to contribute. A good time of the year to do this is on their birthday so that they can feel the joy of giving to others on a day that is special to them. Children should be able to earn extra money by doing extra tasks around the house. A good rule of thumb is to figure out how much you would pay to have that task done by an outsider. For instance, if you pay $10 to take your car to the car wash, offer to pay your child $8 to wash it for you. You might find that a particularly industrious child will wash your car and then move on to the neighbor’s house in order to earn more money.
If you maintain this system throughout their childhood, by the time they are ready for a car they will have a large down payment saved, or a nice sum of money to use in their first apartment. It may seem like handing your child $100 at the first of each month is an expensive proposition, but teaching your children how to properly handle money is priceless.
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