The Allowance

hy give an allowance? At about age five, most children are ready to begin receiving an allowance—one of the most important tools for learning money management. With guidance, managing an allowance can prepare your child for having an adult income and set him on the path to financial well-being. Many experts believe that it is most effective to use the allowance only as a means of teaching money management—not as a source of reward and punishment, or as a means of control.

The importance of choice. Most children will make mistakes. Spending the entire allowance the first day is typical. Let your child do it. But don’t bail him out. Instead, discuss how he may want to treat next week’s allowance.

How much allowance? Some parents base the allowance on age. For example, a five year-old receives $5 per week, a six year-old $6, and so on. However, this method is somewhat mechanical and may be either too much or too little. Another method might be to decide what you expect your child to pay for and then adjust the allowance to his expected expenditures. Look at the current costs of the things children typically buy:

• collector’s cards	$1.00
• comic book	$3.00
• kid’s movie ticket	$5.25
• action figures	$10.00
• compact discs	$18.00
• video game cartridges	$60.00

Of course, your child does not have to have all of these things. This list is included just to remind you that being a kid is expensive these days. As your child grows older, gradually adjust the amount he or she receives by reviewing and revising the list of items to be covered by the allowance.

When establishing an allowance, start a discussion about needs and wants. Help your child to begin distinguishing between needs—things we must have to live—and wants—things we would like to have. Learning this money management skill can save her from impulse buying and compulsive spending later in life. As she grows, it will allow her to develop judgment about how to control her spending.

When and how often should you give an allowance? For 5-7 year-olds, give the allowance at short intervals—once a week is typical. Give it out on the same day of the week and at a set time of day, say after dinner on Fridays. Have bills and coins in the right denomination. Be consistent. To ensure that no one forgets when the allowance is given out, make a note on the calendar.

Should a child earn an allowance? Parents think differently on this subject. Many reach a compromise, giving the child a base allowance whether he has earned it or not, continuing to expect the child to do basic household jobs as part of the family, and paying extra money for “big” chores. There are several advantages to this method. You avoid family clashes, in which the child says, “No, I’m not going to make up my bed for that price,” or “I don’t care about the allowance. I don’t want to pick up my toys.” At the same time, the child learns that he can earn extra money and even negotiate the price for tasks like weeding the garden or dusting the furniture. Be realistic about how much the child can accomplish and how well he can do it. Match the job to the child’s ability and then give adequate compensation when the job is completed.

Saving

Goal setting. Talk to your child about saving for something he truly wants and can save for in about a month—perhaps a Junior Monopoly® set for about $10.00, or a remote control car for about $20.00. Show him how much he needs to save each week to meet his goal. Continue to attach a picture of the item to the savings jar to make the goal seem less abstract.

Interest. Start teaching your child about interest. For every dollar she saves, you can add a dime at the end of the month. (This, of course, is more interest than a savings account pays, but at this point you are simply getting across the idea that saving money can earn money.) Keep the dimes in a separate jar so the growth is visible.


Spending

Learning to shop. If your child has money and saves money, he is ready to learn how to get the most value for that money. In the grocery store, show your children how to select produce such as apples (not bruised), oranges (firm and heavy), and bananas (not too green.) This can be fun, if he or she makes the selection.

When you buy clothing, explain the importance of waiting for sales and selecting quality merchandise. Suggest that he do the same with toys. Ask him to compare the price and the quality of two toys, rather than just forking over his allowance.

More about Money. When we were kids, our parents cautioned us, “Money doesn’t grow on trees.” Today, some children may be as unaware as we were about sources of money. For instance, some may believe that $20 bills just come out of machines, or that plastic cards are all you need to make purchases. How can you offer your child a more realistic picture? Before you go to the ATM machine, take your child with you to the bank to make a deposit. Then explain at the ATM that you are simply using the money you’ve already put in the bank.

When you pay with a credit card, explain that giving the clerk the card is permission to charge your credit card account the amount of the purchase. Be sure your child understands that you will have to pay the credit card bill at the end of the month. When you are paying bills, show your child the credit card statement, saying something like, “Remember the T-shirt we bought for $10? Here it is on the list of things I have to pay for now.”