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By Adriane G. Berg
From MoneyCentral
 It's
hard to come up with a more counterproductive concept than "the
allowance." Even the word is a turn-off to kids. The word implies
that parents, already looming large as authority figures, will
"allow" you to spend a small and very limited amount of their
money on "stuff." If they allow, they can also
"disallow."
Unfortunately, many parents use the allowance to punish kids for acts
that don't relate in any way to money management. I once heard a small
child utter a profanity. The mother said, "Say that again and I
will take away your allowance." Bingo. That's how feelings about
money management, budgeting and savings get all mixed up with punishment
and guilt.
Here is a quick list of dos and don’ts involving allowances.
Do:
- Decide on the specific reasons for giving an allowance.
- Set a realistic amount. Create an expense list of items which the
child regularly spends money on and then add in a little
discretionary cash.
- Give more, without being asked, if prices go up.
- Spend time with your child to review her budget.
- Suggest ways to enhance her allowance through saving and
investing.
Don’t:
- Use it as punishment.
- Give money based on the amount a friend or a sibling gets.
- Forget to pay it and owe your child money.
- Criticize how they spend it, so long as they don’t go over
budget.
- Let them "hit you up" for more money, despite the
allowance.
Why give an allowance?
An allowance is a teaching tool. Why do you want to give your children
an allowance? There are many worthwhile motivations. Do you want to
teach them how to budget? Do you want them to do chores for
compensation? Do you want them to learn to save and perhaps
invest?
If your child's demands for money make you angry, deal with them
directly. Do not use an allowance as a means of avoiding saying
"no." It won't work. Instead, restate your goals in a positive
way, then proceed to structure the allowance to meet those goals.
A child learns nothing about money management if he or she receives an
arbitrary sum each week or month. Start with a list of your child's
actual expenses, such as after-school spending, weekend pocket money,
school lunches and birthday gifts. This is the beginning of learning how
to budget. Once you sit down with your child to make an expense sheet,
he or she will begin to realize what things really cost.
Children can begin learning about budgets as early as 7 or 8 years old.
Children younger than that are too young to make a full weekly budget
and stick to it, according to child psychologists. But starting as young
as 5, you can calculate the costs of a trip to the zoo, a skating party
or a visit to the circus. Help them count out the money and let them
carry some of it in a wallet or a purse. Don't give them all the money
to hold, because little kids might lose it.
Learning what things cost
List the child's expenses and discuss the costs with her. Then for each
expense, have the child list which are costs she can't change, such as a
school lunch, and costs she can change, such as a snack. Then have her
list the expenses she can control in the order of those that she wants
most.
Give her the amount of money she will need to cover those costs. That's
all. If she spends less, she can put the money in the bank or buy
something she wants — it's her extra money. If she spends it all too
soon, that's too bad. This is very different from giving an arbitrary
sum that’s not based on any concrete numbers.
Once the budget is set up, review it with your child once a week, or
once a month for older kids. See where you were wrong about costs and
adjust the allowance accordingly. Computer-savvy kids can use your
financial software to keep up with their expenses.
If your child runs out of money and there is an emergency, lend the
money with interest.
Teaching about saving
An allowance is by its nature money that’s expected to get spent. But,
if teaching savings is a goal, build it into the budget. Add savings as
a line item. Take your child to the bank and open an account with her.
The Young American's Bank in Denver allows children from all over the
country to bank by mail. They send statements to them in their name
along with budgeting, savings and other information in a child-friendly
form. They give good interest rates and even will make a loan to an
older child. The account must be closed when the child reaches the age
of 21. Similarly, your local bank may want to attract new depositors and
many have special kid's accounts.
What happens if your child spends the allowance and fails to save? Don't
stop the allowance, stop the part of it that was earmarked for savings.
Then discuss how money grows with compound interest over time. A
15-year-old gets pretty impressed to learn that $5 a week saved at 6
percent interest compounded daily grows to several hundred dollars by
the time she is in her 20s.
Then, wait a few months and try again to institute the savings portion
of the allowance.
Many parents believe that paying a child for doing household chores
teaches the work ethic and on-the-job responsibility. Others feel that
paying children to take out the garbage is unrealistic, since they won't
be paid for it when they grow up.
For the most part I take the latter view. There is no "going
rate" for doing the dishes. But there are family-related jobs that
play out much like the type of summer jobs they're likely to get when
they're older, such as baby-sitting for siblings, routine office filing
or sorting, painting the garage or other light construction work.
If you plan to pay your children for work, select something that they
are good at doing. If you wouldn’t hire them to do the work, don't
hire them just to teach them about money. Their self-esteem will go down
the drain if you re-do the work or only assign them menial tasks.
No one wants a whining, insisting child or one that throws a tantrum.
But neither should we want a child who can't speak up for herself. In
fact, the fear of asking for a raise and the inability to negotiate is a
serious problem in adulthood that you can help your child
overcome.
Right from the beginning, indicate that you will provide a forum for
increased allowances, one-time extras or a short-term loan. Explain to
your child that to prevail he must make a case based on need, price
rises or any other logical reason. If she has a hard time, help her out.
Teach the skills of self-assertion and compromise.
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