"It makes kids money-conscious," says Laura Levine, executive director of the Jump$tart Coalition for Personal Financial Literacy, a group in Washington, D.C., that teaches money skills to children. "It's our job as parents to teach good money skills because these skills don't teach themselves," she says.
Here's how to turn an allowance into a lesson.
Early money lessons
Money lessons can begin as early as age 3 or as soon as children express interest in money, Levine says. Even at an early age, a weekly allowance teaches coin recognition and how to complete shopping transactions.
Every trip to the store is a potential lesson. "Give your child a dollar to spend on anything he'd like, such as a snack," Levine says. "Pretty soon, he'll understand the value of money and that it has limits."
Teach basic saving using a see-through jar or piggy bank, Levine says. Draw a line on the bank, and fill it with coins to reach the goal.
How much should you give? For young children, the rule of thumb is a dollar or two a week per year of age, Levine says. Or skip a formal allowance at this stage and teach spending and saving using a few coins given as a reward for extra chores and cash gifts they receive from relatives on holidays.
The first allowance
Regular, weekly allowances should begin in kindergarten, says Neale Godfrey, founder of the Children's Financial Network, a company in Chester, N.J., that promotes financial literacy in children. At that time, parents should supply four clear containers children can use to hold money for various causes -- charity, spending money, saving for bigger purchases and saving for college.
"Pay the allowance in small bills and coins, so the child can divide up the money," Godfrey says.
She recommends 10 percent of the allowance goes to charity and the other 90 percent allocated to the other categories.
Teach them how to compare prices. And come up with a list of extra jobs they can do when they want to earn more money to reach a goal, Hodgens says. These are age-appropriate jobs that aren't part of their usual household chores.
Younger children could recycle cans for extra money. Older kids could bag leaves in the fall or wash the family car, Levine says. Older children with more expensive tastes are more likely to tap into extra jobs.
This arrangement encourages hard work and avoids the allowance-tied-to-chores pitfall. "You don't want kids to expect to be paid for everything," she says.