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Ideas for Raising Money-Smart Kids

May 29, 2009

What do our kids learn when we wear $30 shoes and they wear $140 shoes? They’re certainly not learning to make thrifty choices. Kids today have more money to spend and develop financial styles younger than earlier generations did. Yet they are ignorant about money and money management. Parents often pay for extras that kids want in their lives, and then at age 18, without any prior training, we expect them miraculously to manage their own money.

Why an Allowance?
Allowances help children discipline themselves to save, set financial goals, learn how to make purchases with cash, and practice delaying gratification. An allowance makes children aware of the limit of available funds (“No, we can’t have everything we want”). It also teaches them logic and math skills.

We all learn about money, at least in part, by making mistakes. Doesn’t it make sense to let your children make some of their financial mistakes while the cost is minimal?

When to Start
Children as young as toddlers know the shiny stuff has power and buys things. They also know that if they beg long enough, they can usually get what they want. It’s not too early for them to learn they can’t get everything they crave.

Allowance Guidelines
- Try to avoid questioning purchasing decisions other than asking a few questions. We all learn best through mistakes, and it’s better that those mistakes be made now.
- Determine how much money you are already giving your child. Remember to include what you buy for them that they might buy for themselves with a larger allowance. If you aren’t giving your child an allowance, in essence you are managing their money for them.
- Make a list of what they are expected to buy with their allowance (birthday gifts for friends, movies, clothes beyond the basics, eating out with friends, etc.). Then follow the list faithfully. It’s essential to be consistent.
- Let them negotiate raises. What a great opportunity to learn this before they’re in front of a cheap and growling boss! Make sure they tell you how they will spend the increased amount.

How Much Allowance?
Surveys give these weekly amounts as guidelines:

Age 3–8 $3–5
Age 9–13 $5–10
Age 14–16 $14–18
Age 17 $30
Age 18 $40

Remember, the idea is not to give 18-year-olds an additional $40 a week but to use the $40 a week you are already spending on them and let the kids manage it.

How Often?
Start with a weekly allowance and then increase the interval to every 2 weeks or once a month (similar to a paycheck). Pay on time, each time (like a paycheck). If children wish to borrow, charge them interest. They must realize they are spending tomorrow’s dollars today, which will prevent them from saving. You could put an IOU note on the savings jar until the note is paid off. What if your child misses a payment or doesn’t pay off the loan? Repossess the item! Wouldn’t you much rather be the one to repossess your 10-year-old’s skateboard than to have the bank take his house when he’s 30?

Should You Tie the Allowance to Chores?
Most experts recommend that allowances not be contingent on doing chores or on good behavior (such as $5 for an A and $3 for a B). Punishing children by taking away money they’re owed or giving them extra money because they’ve been “good” sends children unhealthy signals.

When they do a good job with their chores, praise them. When they don’t do their chores, take away some privileges. They must realize that all family members have chores. Everyone on the team must take part for the home to run efficiently.

But it’s OK to pay for extra chores. The message is that they can work harder for the things that they want (like those $140 shoes). Remember that feeling of working hard for something and then really appreciating it?

How Can I Teach My Kids About Money?
Several games are available that teach children about investing, the stock market, and business principles. There are also “money camps” for kids where they are taught about investing through competitions and team challenges. Some mutual funds (e.g., Stein Roe Young Investor) gear their investor packets toward children and can be a good first fund to help pique a child’s interest.

You can also suggest guidelines on how your children use their allowances once they’ve received them. Because children aren’t taxed on their allowances, a simple rule could be that they spend a third, save a third, and give a third to others such as donating to a charity or spending it on a friend’s birthday gift.

Elizabeth A. Barrett, MA, CFP®, Plantation, FL

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