Money-Smart Kids: Allowance

We live in a world where parents may give their children a weekly allowance of $20 and before they know it they’ve spent another $50 on their children’s Webkinz toys and other various forms of entertainment. While the $20 might be the right amount for their child, the extra hand-outs aren’t giving their kids a good understanding of how to manage their own money and instilling the sense of good financial values.

I like to think there really is no right amount. In order for kids to get a good understanding of how to manage their allowance, parents should begin with an amount they feel comfortable with their children walking around with. Then they can increase how much they give as the children can prove they have a good understanding of what I like to call the 5 pillars of money. These are Saving, Spending, Donating, Investing and Entrepreneurship. Using these five pillars will also build good enough judgment in children to realize maybe they don’t need a new toy every week.

Here’s how to start: When you start an allowance (or restart if it’s off on the wrong foot) you need to be explicit: this is a tool to help your kids learn how to manage money—the better you do, the more you will have to manage; the worse you do, the longer it will be before there is an increase. The allowance is a way of helping your kids learn good money habits—not of reward or payment for chores, or a means of getting them off your back! Keep this clear and you’ll have fewer arguments in the household.

The next step is to make the allowance meaningful for kids. Of course it will depend on their age but here are two suggestions you can try:
• For younger children, the best resource we know of is the Money Savvy Generation piggy bank. This is one of the resources we send children whose parents are part of our Lenox Money-Smart Kids Program. For those who haven’t seen this, it’s a clear bank so kids can see the coins and bills stacking up along 4 chambers – Save, Spend, Donate and Invest. Even if they don’t understand what to do yet for each of these, they’re beginning to understand the concept of managing money.
• Second, when kids are a little older and are walking around with their own money, you can link their allowance to one of their interests and create a budget they have to stick to. Let’s say your child is really into sports memorabilia. Rather than having the monthly conversation about what you will and won’t buy for your kids, you could give them $15 a week as a part of the “sports memorabilia” budget. no If they want Derek Jeter’s autographed baseball, they’ll have to save for a few weeks.no If they choose to buy packs of cards every day, that’s fine too.
Review these parameters with the children regularly. Eventually you can help them decide when something may be worth donating to a less fortunate kid who likes sports too. One day they may even realize something is worth more than what they paid and they can sell it on eBay.

Once they’ve proven they can handle one type of budget, you can add more. When they’re ready, it’s the best way for them to continue mastering the 5 pillars.

Throughout all of this, the most important resource parents can give is their time. The more parents talk to their kids about their own finances and values, the easier it can be for them to understand what it means to be given the privilege of having an allowance. And the more children will gain better and more independent judgment as a result.

Getting started is always the hardest part. But developing a plan and sticking to it will eventually get everyone where they ought to be.
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