Allowances...Kid's Money Management

Tuesday, July 10, 2007

by Team Riley

Last Update: 12:01 AM ET Jul 6, 2007

NEW YORK (MarketWatch) -- Money management is the one subject conspicuously absent from most school curriculums, which means your child's financial education begins and ends at home. And one of the best tools or teaching your kids about managing their money is an allowance.

Here are the five fundamental rules of allowances:

Start early. While many parents have a hard time deciding when to begin, a good rule is: start them off as early as you can. Studies have shown that kids as young as 3 understand the concept of money and are eager to learn more about it.
Determine an appropriate amount. How much to give? Many experts recommend calculating what you spend on your child every month and then determining which expenses he or she will be responsible for covering. (These might include school lunches, clothing costs or entertainment expenses.) Give your child enough to cover weekly expenses, as well as some extra money to save or spend on other things.
Be consistent. The way you approach children's allowances can teach them a great deal about responsible money management. To ensure that they understand the importance of fulfilling financial obligations, make sure to pay regularly and on time!
Help them track their expenses. Initially most children run through their allowances without knowing exactly where the money has gone. If this happens, take the opportunity to explain about budgeting. Sit down with them and make a list of regular expenses so they can begin tracking spending.
Keep chores separate. If you make your child's allowance contingent on the completion of chores, you send the wrong message. Housework is a family responsibility and children should not be paid for pitching in. Experts agree, however, that offering kids an occasional opportunity to do "extra-credit" work around the house in exchange for pocket money helps teach the value of working.