Use Children's Allowance to Teach Valuable Money Skills

One of the hardest parts of parenting is allowing your children the freedom to learn from their own mistakes. We all want to protect our kids from harm, but if sheltered too much, they won’t be ready to deal with real-world challenges when they leave the nest. This is true for managing money just as with avoiding physically dangerous situations.

So, how to teach your kids sound financial habits? Try setting a good example with your own spending behavior. If you consistently spend beyond your means, don’t set aside emergency savings and don’t use a budget, your kids might imitate your behavior and set themselves up for problems down the road.

Involve your kids in budgeting for their own expenses at an early age. How you structure an allowance, what expenses it should be used for and the appropriate age to begin will vary by family, but here are a few guidelines my family has found helpful:

The goal of an allowance should be to teach children how to handle money wisely, not to reinforce good behavior – otherwise, your kids might think it’s okay to forego completing chores, getting good grades or treating others well, if the only consequence is missing out on a few dollars. It’s better to link those good behaviors to developing a sense of family responsibility and cooperation. Plus, when you put a price tag on good behavior, you might start seeing an outthrust palm every time you ask them to answer the phone or pass the salt.

Develop a needs-based allowance amount. Track your kids’ discretionary (toys, candy) and non-discretionary (school lunches, school supplies, clothes) expenses. (You’ll be shocked.) Then, depending on their ages and maturity, decide which expenses you want them responsible for managing, and set a reasonable amount for each category – this will be their allowance. For example, my wife and I give our seven-year-old son 50 cents a week.

Start out slowly with only a few discretionary expenses, then gradually add others and increase their allowance as they become more confident. Realize that they’ll probably make a few mistakes – that’s part of the learning process.

Stick to your guns. If your son burns through his allowance by Tuesday and then begs for a new toy on Wednesday, tell him "no"; giving in sends a mixed message about the importance of budgeting. Use it as an opportunity to explain the importance of saving for things they really want and learning to live without those that don’t matter. Nobody likes delayed gratification, but the sooner they learn it, the easier life will be later on.

Use an allowance to teach important life lessons. Try to include an amount your kids can set aside for charitable giving. For example, my son knows he must donate 10 percent of his allowance to charity. Dedicate another portion to savings. You might offer to match savings account contributions to teach the value (and rewards) of saving.

Remember, the sooner your kids learn how to manage their own money, the sooner you’ll be able to concentrate on your own.

by Jason Alderman