Celebrate Your Child!

Apr 25, 2009

Giving kids an allowance (I)

Why an allowance?

To learn to ride a bike, you need a bike. And to learn to manage money, you need … a little money. By practicing with their own money, children get to try out concepts – saving for a rainy day, prioritizing goals, and delayed gratification – that might otherwise seem abstract or irrelevant.

Allowances give kids room to make mistakes in a low-risk environment – sort of like learning to drive in an empty parking lot. If your 8-year-old can't go to the movies with a friend's family because he burned through all his allowance buying action figures, he may be more likely to plan ahead when he gets next week's allowance.

Think of it this way : Teach your child the pitfalls of impulse buying early on, and he's less likely to arrive on your doorstep years from now with a duffel bag full of dirty laundry and a mountain of credit card debt.

What's a good age to start?

Around age 5 or 6 is typical. But some parents start in the preschool years, while others wait until age 10 or older. There's no magic starting time, says Kristan Leatherman, coauthor of Millionaire Babies or Bankrupt Brats? Love and Logic Solutions to Teaching Kids about Money. "The best time is when your child begins to understand that money can buy him things he wants."

So if your child tends to shrug at money, losing it before it can find its way to his dusty piggy bank, hold off until you see signs that he enjoys saving it or thinking about how he might use it.

How much is reasonable?

Consider your family's financial resources, the cost of daily living in your area, and your own comfort level. "I've seen it all over the place," says credit union market manager Mark Hodowanic. "While there might be some general rules of thumb, it’s up to your family to decide what's best."

Many families like to use a formula corresponding to age, such as 50 cents or a dollar per week for each year of a child's life ($3.50 or $7 for a 7-year-old, $4 or $8 for an 8-year-old). A formula has certain advantages over a flat amount, says Leatherman. "The kids get an automatic raise on their birthdays, so it takes away the question of when to increase the allowance," she explains. "And it cuts out sibling arguments, because the younger kid can understand why the older kid gets more."

While many families give allowance weekly, others do it biweekly or monthly. The important thing is consistency. Set up a system to help you remember, so you have the right change and to avoid nagging reminders from your child. On the other hand, don't feel stuck – if your current arrangement simply isn't working, you can always sit down with your child and come up with a different plan.

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