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Most experts agree that giving your children an allowance can help you teach them about money. But first you must make sure that the way you have set up the allowance promotes the lessons you want to teach. Consider some basic guidelines:
- Talk to your children before you start. Explain that you want them to learn to handle money wisely, and you understand that they can’t do that unless they have money to handle.
- Give an allowance that is consistent with the child’s age. Older children need more money than younger children, but they should be allowed to show that they can handle smaller amounts before they get more. They should have enough money to budget and to spend.
- Be clear about what you expect your children to pay for, and let the allowance reflect that. Do you expect the children to pay for lunch at school? Do you want them to buy their own clothes? Many parents decide they will pay for basics like school lunch and school clothes, but the child must pay for extras. For example, you might agree to spend $50 for a pair of sneakers, and if your children want more expensive shoes, they have to make up the difference. Once children reach driving age, determine what car-related costs are up to them. Parents should decide together what they will pay for, and they should stick to their agreement with the kids.
- Don’t forget about saving and charity. You can insist that they set aside a certain amount for saving and for charity, or you can encourage such activity by, for example, agreeing to match all or part of what they save. Help them learn the difference between saving for shorter-term goals, like a video game, and for longer-term goals, like college or a car. Many banks offer no-fee and no-minimum savings accounts for kids, and you can talk with your financial adviser about money market accounts. Once the savings reach a certain level, consider having your adviser talk with your children about investment options. Encourage your children to identify a charitable cause or causes that they can support, and remind them that they can donate time as well as money.
- Offer guidance, but don’t dictate. You probably have some “house rules” about what your children can and cannot have, and those rules also apply to what they buy with their allowance. For example, if you don’t allow violent video games, your children can’t use their money to buy one. Your underage children can’t spend their own money on beer. Other than those sorts of things, though, let your children make their own decisions about how to spend their money. Of course, you can talk to them about whether a specific purchase is worth the cost, but in the end, it’s up to them.
- Don’t bail them out. Eventually they will spend a fair amount of money on an item or an activity that does not live up to their expectations, and that is an important part of the lesson you want to teach. Similarly, you might want to insist that the kids pay for their own carelessness – speeding tickets and library fines, for example.
- Don’t tie the allowance to routine chores. You want your children to learn how to function as members of a family, and that involves basic responsibilities like picking up after themselves or helping out around the house. On the other hand, you might want to pay for extra work. Just don’t get yourself into a situation where you are constantly haggling with your children.
- Neither a borrower nor a lender be. If your children don’t have enough money to buy something they want, they will learn about budgeting and making decisions. And be a good example -- don’t borrow money from your kids to pay the pizza guy.