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All about your child's allowance

Most financial experts agree that children should be given an allowance in order to learn financial skills at an early age.

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Janet Bodnar, deputy editor at Kiplinger's Personal Finance, defines an allowance as a fixed amount of money that children get at regular intervals in exchange for certain financial responsibilities that they take on.

"Giving your kids an allowance is the best money management tool you can use with your children," Bodnar says.

Have you ever noticed that children will spend unlimited amounts of money as long as it's yours?

"When it's their money on the line, children make more informed purchasing decisions," Bodnar says.

The problem is that most parents resist giving children an allowance and, if they do, they usually give the children too little. If the allowance isn't large enough for children to experiment with -- to make mistakes with -- it won't have the learning effect you'd like it to have.

How young is too young?
As soon as your child begins to express a sincere interest in material wants (as in, "I want that!"), it's time for an allowance. Depending upon the child, that's probably around the ages of 3 to 5.

The first mistake most parents make is starting too late. The majority of parents wait until their children are tweens (9 to 12 years old) and they miss out on the opportunity to discuss money with young children who are more apt to listen to, and take, their parent's advice. By the time kids are teenagers, they have additional influences on their spending habits, including friends, advertisements, pop culture and the media.

How much is too much?
Usually the first question parents ask is, "How much allowance should I give my child?" Some experts recommend a weekly allowance that totals a dollar for each year of the child's age. But, rather than base a dollar amount on the child's age or giving the same amount that other parents are giving their kids, make an informed decision based on what you expect your child to do with his or her allowance.

As your child gets older, she'll have to take on more responsibility for her spending habits as her allowance is increased. Decide as a family what the allowance is to be used for. Will the child be expected to purchase movie tickets, clothes, birthday gifts for friends and school lunches with the weekly allowance? If so, the amount has to be high enough to cover those expenses. Then, if the child runs out of money by the end of the week, she won't have money to go to the movies or to the mall on Friday night.

Tying allowances to chores
Most financial experts agree that linking the allowance to the completion of chores is not the best approach.

"My recommendation is to keep the allowance totally separate from the chores," says Aletha Solter, a developmental psychologist and founder of The Aware Parenting Institute in Goleta, Calif. "That way, children will learn the value of cooperation and experience what it feels like to contribute to the family."

In addition, once children have other streams of income (monetary gifts for birthdays and holidays or a part-time job after school), they often balk at doing chores at home in order to earn their allowance because they are no longer dependent on Mom and Dad for income.

Giving extra money for bigger chores -- not those that you expect your child to do daily or weekly -- is fine. For example, if Dad usually pays to get his car detailed once a year, he might be willing to pay for that task to be completed by someone in the family. Or, if the children help with the annual "spring cleaning" of the garage, that might be worth greasing the palms of helping hands.

Next: "The sole purpose of the allowance is a tool for learning. ..."
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