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Allowance: Helping Kids Become Money Savvy

Parents reach a point when it's time to give their children a money allowance, many parents aren't quite sure how to begin.  Allowance is a perfect tool for teaching children how to manage money.  And children need those lessons now more than ever.  As they enter into adulthood, they'll need the skills to save responsibly, send wisely, and to help avoid debt.  In recent years, consumer debt and personal bankruptcies have set national records, while savings rates have plummeted.  And 66 percent of American high school students failed a basic financial literacy test according to the Jumpstart Coalition for Personal Financial Literacy.  So teaching kids money skills is more valuable that any cash a parent can fork over.

Parents need a set of strategies and ideas to reinforce the lessons kids need to learn about earning, spending, and saving money.  Below are several flexible strategies that you can try:

Earning

  • Set a Weekly Budget
    • For two typical weeks, tally all the spending you do for each child - including lunch money.  Have kids compile a list of the spending they do in the same timeframe, then use both to figure a reasonable allowance that factors in nessecities each child is expected to pay for (such as lunch) as well as discretionary money.
  • Should Money be Tied to Chores?
    • When it comes to setting up an allowance, the is the biggest question for most parents.  If you want to link payment of allowance to certain chores, that's up to you.  But it's worth noting that many family finance experts warn against this because it can breed problems. 
  • Keep it Simple
    • Set an allowance plan that's consistent and fair for every member of the family.  For example, a simple one-size fits all weekly allowance policy might be to pay each child 50 cents per years old until age 9, and then $1 per years old.
  • Put Older Kids on a Monthly Plan
    • Consider paying older kids a monthly allowance.  A longer time fram between allowances forces budgeting.  Some rules that you might add for older kids include that they must buy their own lunch, and contribute a percentage of their allowance to all purchases of school clothes, athletic equipment and extracurricular supplies.
  • Pay for Extra Work
    • Whatever you decide about tying allowance to regular chores, you can reinforce your child's budding entrepreneurial spirit by developing a list of "optional"  chores that pay extra money.  These may be chores that parents would consider paying outsiders to do such as washing the car or painting a fence.
  • Set a Lunch Money Bonus
    • As kids get older, include lunch money as part of their allowance payment.  One incentive you might offer is that your child can keep the lunch money for each day he or she makes a lunch at home and brown-bags it.

Spending

  • Give Them a Money Log
    • Encourage kids to track their spending by entering purchases in a journal os a software program like Microsoft Money.  In fact, you might offer a smal incentive - 50 cents a week - for every week that they successfully update their log.
  • Set Spending Goals to Avoid Loans
    • Giving advances or loans on allowances encourages the "buy now pay later" mindset that plunges consumers into credit-card debt and personal bankruptcy.  Instead, encourage kids to save for spending goals, or "save now, buy later". 
  • Let Them Make their Own Decisions (and Mistakes)
    • Spending mistakes and regrest are key elements in any money plan.  Once you've offered advice and guidence, let them make their own spending choices, even if they occasionally turn out to be bad ones.  This helps them see the consequences of spending impulsively or blowing every cent early in the week.
  • Discuss Money in Day-to-Day Activities
    • Make money discussions a part of your interaction with the kids.  At the store, explain why you use coupons or compare brands before buying.  When you're paying bills, show how you fill out the check and explain how a check works.  Similarly, explain the credit card.  This should not be conceived as a magical card with unlimited purchasing power.  Interest and the consequences of credit card overuse should be highlighted early and often.

Saving

  • Make an Event of Saving
    • My Dad always told me to "pay yourself first".  Put at least 10% away in savings before you start spending.  "It's always a great feeling to have something in the bank".  He was right. 
    • Open a savings account for your child.  Although it might be easier for you to open the accounts yourself, make a big deal about it and let the kids take part.  Most banks don't give passbooks anymore, but your child will get a deposit book.  For younger kids, you may want to have a visual chart to show the groeth of their savings.  If your bank offers online services, help older kids set up Web access where they can check their balance regularly.

Overall - teaching your children about money and money management may be one of the most valuable skills you can share with them.  It's not taught in schools.  But something this basic and important really should be.

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