Paying Allowance Can Pay Off, If You Do It Right

Kids  with piggy bank.jpegYour child wants to know why one friend gets $10 a week, another gets a whopping $50 — but he or she gets zero. Should you give in and pay your kid an allowance?

When it comes to helping your child learn the value of money, an allowance gets a thumbs-up from financial experts. “Kids have better money habits if they’re given a chance to make money choices,” says Roger Young, a senior financial planner with financial advisory firm T. Rowe Price. “One way to do that is to provide them with an allowance.”

  1. Rowe Price recently released its annual “Parents, Kids and Money” survey, in which  66% of parents reported giving their kids an allowance. But few moms and dads simply hand over cash without a requirement, such as doing chores or earning good grades. Most report that their children have to earn their allowance.

How much is enough?
According to the survey, more than half of parents who give an allowance give $10 or less per week. But there is a wide range — one out of every 10 parents gives more than $50.

If you decide to give an allowance and your child has friends who are getting more, be prepared for complaints and requests for more cash. If those arise, ask your child to focus on his or her own money goals, says Joe Santos, a financial advisor and Los Angeles-based regional executive for Merrill Edge, the Merrill Lynch online investing platform.

It might also be a good time, he says, to talk about the futility of trying to “keep up with the Joneses” — after all, the most important factor in deciding whether to offer an allowance is your own family budget, not someone else’s.

If you’re already giving your child an allowance but have room in your budget to meet a request for more, consider asking what would justify the raise, says Christopher Krell, a certified financial planner and principal at Virginia financial advisory firm Cassaday & Co. For example, the child could offer to take on more responsibilities in caring for a family pet.

How should an allowance be spent?
Krell suggests urging young children to earmark a third of their money for savings, a third for spending and a third for sharing or charity. “As kids grow into their teen years,” he says, “they can also learn how their savings accounts get a boost by calculating compound interest.”

“Share with your child that it’s not what they have,” Santos says, “it’s what they keep.”

But don’t expect children to always make smart spending decisions. They might blow through their allowance right away and later realize there’s something they really want to buy, but they’re out of cash, Santos says. It’s best if parents resist the urge to bail them out. “They can learn the consequences of spending all their money too quickly,” he says.

With an allowance, children can learn how to save and earn interest on their own money until they’re ready to make a desired purchase without incurring debt. That’s a good lesson at any age.

Teaching Kids Lifelong Money Lessons

College Savings Pennies.jpg

We visit local elementary schools every spring for a project called “Teach Children To Save.” This is one of our favorite annual events because it gives us a chance to talk with youngsters and to help mold responsible financial citizens of the future.

It’s funny because these third graders have a pretty firm grasp on the difference between a need and a want as well as the importance of saving money. Inevitably several kids will raise their hands to tell us they are saving money for a car or college. Once we had a little boy tell us he’s saving for a wife “because they’re expensive.” We giggled but love the spirit behind his hard work.

On the other hand, we also talk with high school students and are surprised to learn how few are saving for anything. It’s a tough age, one where the expensive shoes are a necessity rather than a want and where there’s never enough money for all the socializing, gadgetry and new clothes they desire.  It’s hard to talk to older kids about saving money but it’s still something that parents need to do.

The best approach is to start when they’re young and to continue the dialogue as they grow. Even little kids have opportunity to earn money with chores or an allowance. Lots of times there are monetary gifts for holidays too. Begin by teaching them they can have fun with their money while saving a little too.

We once met a teen whose parents set her up with a savings system when she was a toddler:

10%        Tithing
10%        Retirement
10%        Car, college, house (in that order)
70%        Anything she wants

She’s an adult now who was able to buy her first car and contribute to her higher education. She continues with this savings system and has a better head start to retirement than a lot of older adults. She said her parents did not shelter her as a child but talked to her about some household expenses and why they save money.

One financial expert that we read suggested enlisting help from the grandparents. Instead of shopping for things, the grandparents send the kids each a check on their birthday. It’s for $100 plus their age. Everyone understands that it’s for saving, not spending and it has become a fun annual tradition that gives a big boost to the child’s savings account.

Another way to make savings fun for kids is to give them a short term goal for something like a coveted toy. Create a savings chart that helps them follow their progress. Achieving short term progress will encourage them to dig into long term goals as well.

Finally, remember they are still kids. Make them work for it to appreciate the value of a dollar through chores or an after school job. Consider incenting your kids by matching their savings. This will give them a boost while instilling an important life lesson.