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Money Management Starts with Allowance

By Caryl Horan

Reprinted with the permission of The Bridges Initiative Inc. who originally published this article in the Life Skills Information area of their Career Explorer web site.

WHAT IS IT with parents? They buy us a pack of gum here or a chocolate bar there, they pay for the gotta have them $100 new jeans and a trip up the ski hill and then when we turn 18, about the same time most of us leave home, they slam the wallet shut and tell us it's time for us to learn how to manage our own money. Money management starts with money, your own money, and even a preschooler can start to learn that a penny saved is a penny earned.

Sometime early in life, usually around the age of three, a kid discovers money. They figure out they need the shiny stuff in mom's purse if they are to get their paws on that special toy they just saw advertised during Sesame Street. They know that money has rewards, it has power but what they don't know is how much value it has. Most kids figure that if they beg long enough, no matter what the cost, sooner or later mom and dad will come through with the goods.

That's where the problem is. Most kids are never taught the skill of money management until it's too late. Sometimes they get a few bucks for a birthday or Christmas gift but most kids don't get a regular salary from their folks. First hand experience is vital to learning smart money management skills and without the money, there is no experience.

This is how an allowance fits in. Financial Advisor David McCurrach who has started up a Web page called Kids' Money says a survey of parents shows that about 60% give their kids an allowance. "It's shocking because the only way kids learn about money management is by their own successes and failures, and you have to have money to do this."

Linda Barbanel, author of Piggy bank to Credit Card believes that as soon as your kids are old enough to ask for something in the grocery store it's time to start up with an allowance. "Whenever a child says 'gimme' you know he is ready to be taught to save."

Estimate how much you are already spending fulfilling requests to buy this or that each week and then set that amount as their allowance advises McCurrach. One formula is to give the child a dollar a week for each year of age however a four year old could start quite nicely with two dollars a week.

It is critical that you sit down with them first and tell them exactly what they are expected to pay for from their allowance. You can't tell them what to buy but you can say their allowance is to be used in three areas:

Sharing - Church or charitable donations, birthday presents for family or friends.

Spending - Toys, candy, specialty clothing items and entertainment.

Saving - 10-20% of allowance needs to be put away to save for something they want that costs more than the weekly allowance.

John Messervey from the National Family Business Council suggests using a journal to keep track of exactly where the allowance is going. "Once a week write in dates and amounts and show the child how and where they spent their money, how much is left and how much they have in savings. Messervey points to several banks who offer "kids accounts" where as little as a dollar can be deposited without monthly fees and the child receives a bank book where they can keep account of their savings.

Many parents are prone to tie an allowance to weekly chores, but it is a mistake. "We tried that" says McCurrach "it was a disaster. If the child doesn't need the money they get into trade-offs like they won't clean the bathroom because it is not worth the two bucks." Besides, it is impossible to learn how to manage money without a regular income and if one week there is no money it blows the consistency.

Paying for "extra chores" is quite all right especially if the child is after a high-ticket item. Just make sure that the chores are above what is usually expected of them and that the money earned goes directly into saving for that particular purchase. The lesson is "I can work harder for the special things I want."

Remember, the reason you are giving your kid an allowance is to teach them the value of money and to set the foundations which will carry them through their adult years. Sure, you could just give them the hard cash if you can afford it, but having saved for something themselves they have learned patience, discipline and hopefully money smarts that will last them a lifetime.

Take a look at Kids' Money for regular stories dealing with kids and finance.

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