One of the best ways to teach children about money is to let them actually use it. An allowance gives kids their own money and lets them to make choices – and mistakes – that will ultimately teach them how to handle their own finances. Most experts say you can start giving an allowance to a child as young as age 6, though parents should make that decision based on the individual child. Here's how to set up an allowance system that will work for your family.
Think About Goals for Allowance
We all want our children to grow up able to earn and manage their own money. Some parents have additional financial values they wish to instill, such as saving for a rainy day or giving money to charity. All of these values are easily incorporated into an allowance system. One simple way is to give your child three different banks, marked "save," "spend," and "give." Every week, your child will divide his allowance among the banks. For very young children, simplicity is best. Give them an amount that is easily divisible by three, and have them divide their money equally between the three banks. Give allowance in cash, since it's more concrete for young children, and consider giving it in quarters if you're dealing with small amounts. For example, if your 6-year-old child receives a $1.50 allowance, give him six quarters and tell him to deposit two quarters into each bank.
Create a System
You can buy banks with separate slots for spend, save, and give, or you can make your own divided bank out of wood or a cardboard box. If you already have piggy banks, collect three of them and label them appropriately. Involve your child in creating the banks, or have her make them herself. Decide on a day of the week to dole out allowance.
Choose an Amount
Before you can pick a dollar figure, think about what your child will need to spend her money on. One of the most important parts of an allowance system is giving your child responsibility along with money. Let your child know he will be receiving an allowance, but will also be expected to spend his own money for certain things. Young children can be responsible for buying their own toys outside major holidays or birthdays, or for buying their own snacks when the family is out for the day. Older children can pay for more things, such as birthday presents for friends, music or games, and even their own clothes. Think about the responsibilities that will work for your own family. Of course, how much you give for allowance will depend on what you expect your child to buy with his allowance. If you plan to split up the allowance into spend, save, and give categories, make sure you're giving enough so he can buy everything he needs with the spending portion of his money.
The goal is to let your child spend money on things she wants – and to occasionally let her make her own mistakes with her allowance. Most experts advise against tying allowance to household chores, saying it's best to cultivate responsibility to the family without attaching financial strings. Let her allowance be her own money, regardless of other factors. However, it's fine to set some guidelines for what she can and can't buy with her allowance. If you don't allow certain toys in the house, for example, let her know up front that she still can't buy them with her own money.
Let the Allowance Begin!
Now that you've made all the important decisions, it's time to start the allowance system. Watch for opportunities to talk about money with your kids and why you choose to spend money the way you do. Talk with them about their own spending habits and savings goals. Fine-tune the allowance system to fit your own family's needs and lifestyle. When you child wants a raise in his allowance, tell him to give you a proposal for how much he wants and what increased responsibilities will go along with the raise. You're now well on your way to raising a financially savvy kid!
Tiffany Reevior is a freelance writer living outside Boston with her husband and their six-year-old son, who recently started receiving an allowance.