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10 tips: Kids' allowances

Set up your kid with a smart allowance plan

By Laura T. Coffey, Times Correspondent
Published July 22, 2007

Are there universal principles that parents can use to teach their kids about money? Financial and child-development experts say a smart allowance system can help children learn how to handle money with self-discipline and confidence.

1 Decide when to start. Some experts say allowances should begin as soon as a child is old enough to stop swallowing money - at around age 3 or 4. Others recommend waiting until around age 8.

2 Let the conversations begin. Before handing over cash, help your child understand that money allows them to make important choices and set goals.

3 Opt for a transparent piggy bank. Porcelain piggy banks with one little slot sure are cute - but imagine how much a kid could learn with a see-through, four-chambered piggy bank that helps them think hard about how to allocate their funds. Money Savvy Generation www.msgen.com makes the Money Savvy Pig, which includes places for kids to stash coins and bills in "save," "spend," "donate" and "invest" categories.

4 Use small denominations. Give children four quarters instead of a dollar bill. They may be more likely to save, donate or invest a portion of their allowance if they receive it in small chunks. Continue paying your children in cash even as they get older. It's the easiest way to help them appreciate the real value of money, as opposed to the abstract realm of debit and credit.

5 Beware of plastic. Prepaid debit cards are being marketed to teens. Watch out: Many of the cards carry shockingly high fees.

6 Strategize. Give the allowance on a Sunday night or some other time when the child can't rush out and spend all the money. It's also wise to assign some responsibilities. Even young children can use a portion of their allowance to pay for items they regularly want or need. Ramp up those responsibilities as they get older.

7 Resist the urge to interfere. With the exception of agreed-upon fixed expenses, give children control over what they do with their allowance money. Let them learn from their spending mistakes while they're young and the stakes aren't too high.

8 Be dependable about payday. It might seem reasonable to withhold allowance money if your child misbehaves - but experts say allowances generally shouldn't be tied to behavior.

9 Payment for chores can be risky. Be careful about linking the allowance to chores you expect the child to do. Your child could start asking, "how much?" every time you ask him or her to do something. Parents and children can discuss pay for extra jobs, such as mowing the lawn or washing the car, though.

10 Be careful about lending and borrowing. If you give your child an advance, think about lending with interest. That could teach a valuable lesson about the high cost of borrowing. Avoid borrowing cash from your kids. Many parents tend to resent having to pay the money back, so they don't - and the child is left with a broken promise.

Laura T. Coffey (laura@tentips.org)

Sources: Peggy Eddy of Creative Capital Management Inc. (www.creativecapitalmgt.com); Susan Beacham of Money Savvy Generation (www.msgen.com); Janet Bodnar's "Money Smart Kids" column on Kiplinger.com (www.kiplinger.com/columns/kids/)

[Last modified July 20, 2007, 21:45:11]