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Liberty Financial's Young Investor Parent's Guide On Allowances

Reprinted from the Liberty Financial Young Investor Parent's Guide with the permission of Liberty Financial Companies, Inc. Copyright 1993 by Liberty Financial Companies, Inc., 600 Atlantic Avenue, Boston, Massachusetts 02210. All rights reserved.

"We cannot always build the future for our youth, but we can build our youth for the future." Franklin Delano Roosevelt

For generations parents have been doling out allowances to their children. Every family has a different system. Some children are required to perform household chores in exchange for a weekly stipend, others demand nothing extraordinary. Many compensate children separately for performing certain household chores.

Many psychologists and parents agree that children can manage their money relatively free of parental coercion. Most also agree that money shouldn't be used to change behavior. Punishing children by taking away money they're owed or giving them extra money because they've been "good" sends all the wrong money signals to your children.

Designing a Program That's Right For You
Deciding when and how your child should begin receiving an allowance or performing household chores for extra money takes careful thought and planning. You may want to regard both as business deals between you and your child. Some people think that depersonalizing the process upfront reduces the chances for family squabbles later on.

If you don't believe in "allowances" don't feel compelled to pay just because your children want them. But, be sure to provide them opportunities to earn extra money and learn how to manage the money they earn or get from you.

Every family is different. You shouldn't feel guilty if your plans are less generous or more generous than your neighbor's. Even though the rules for allowances and earning extra cash differ from household to household, there are some basic guidelines that all parents can follow. Here are several useful points to help you design reasonable and responsive programs.


1. It's never too early to start.
If you've hesitated because you don't think your child is old enough to handle money, keep in mind that recent studies have shown that most 3 year-olds are ready and eager to learn about money and how things are bought and sold. By the time they're 5, many already have started to save.

2. Establish who gets what.
Develop a consistent system that pays more to older children. But keep it flexible until you hit on the right formula. In general, your plan should be more generous with older children because their needs tend to be greater. Many parents seem to favor a plan that increases at the start of each new school year. It's a good idea to present your proposed plan in written form and seek input from all members of the family. Then, make adjustments accordingly.

3. Describe the rules.
Each child should understand why she is receiving an allowance and what expenditures it's supposed to cover. If you've decided to pay an allowance to your children because they are members of the family tell them so. But also remind them of the general responsibilities they have as members of the family. If the allowance is tied to household chores, describe those assignments in detail.

4. Pay on time.
Paying on schedule will subtly teach your children the value of honoring one's obligations.

5. Allowance is not a control device.
Unless the allowance is tied to specific work assignments, you should avoid threatening the withhold payments. If the allowance is related to work, from the beginning of the program be sure to indicate in writing that the allowance may be withheld if the related jobs aren't completed.

6. Develop accountability.
Some parents require their child to account for how the money was used. This kind of activity can prepare a child to handle larger sums and manage a checkbook. As a rule, you should avoid questioning the purchasing decisions of the child. However, you many want to offer helpful advice on how the money can be spent more productively.

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