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By Michelle Huffman
Allowance is a child’s original finance teacher.
As a parent, you give your child money and the child determines what to do with it, along the way learning about planning, budgeting, opportunity cost and value. It’s a life lesson that’s been passed down for generations and it remains a powerful way to give children a hands-on way to understand money.
Many financial experts argue that giving an allowance untethered to actual work is not productive (and one expert goes so far as to call it “cruel” because it is such an inefficient way to teach), but it is still a popular way to handle allowance. There are multiple methods to consider.
With each method, parents should consider how the whole lifecycle of the plan. How will raises work? Are they attached to age, additional workload or more advanced work? Are bonuses available (for example, good grade bonuses)? The more thorough parents are with their allowance plan, the more prepared they will be to focus on the real purpose of the allowance: Teaching children about money.
All the while parents are setting up and executing the allowance program, they are talking to their children about budgeting, setting savings goals and designating a portion to helping others. Several experts recommend ensuring your child divides allowance (and perhaps any other received money) into three jars or categories: spend, save and share.
Children as young as three can understand basic money concepts and could benefit from an allowance. However, as the child gets older it may be appropriate to start adding bills into the mix. If your child wants some a subscription service, for example, paying that bill or a portion of that bill every month, regularly, before they get paid helps set them up for a successful understanding of bill pay later on. As they become teenagers, you can look into teenager checking accounts or even credit cards for them.
Finally, parents must decide what children should cover with their allowance and what parents will continue to fund. The American Institute of CPAs ran a survey on allowance and found that “parents who give kids an allowance are more likely also to pay for things their children want, like downloads, movie rentals, cell phones and hobby-related items.” Parents need to designate certain categories of things as “wants,” not “needs” and expect children to cover the costs. Otherwise, the allowance isn’t quite doing its job.
At the end of the day, or the pay period, consistency is key — as it is with so many things when it comes to kids. There’s a lot to learn about money, but if they know that money is coming in and they must learn to manage how it goes out, they will begin to understand how to meet their wants and needs without begging mom and dad.
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