Using an allowance to teach kids about money may seem a little strange for some parents. Regularly handing over money for nothing? It seems a little counter-productive, not to mention that it might send the wrong message about where most of our money comes from. But paying children to do household chores that they should be doing anyway also seems not quite right to many parents.
An allowance can be a vital part of teaching children how to handle money and to make wise decisions. However, the challenge is providing this allowance in such a way as to make sure kids earn it in some way. But earning an allowance doesn’t always mean getting directly paid for some chore or service. Instead, kids can show they deserve their allowance by following guidelines you set for them.
Set Allowance Rules
Explain to your children that you expect them to learn to make good money decisions. Let them know that they can show you that they deserve an allowance by making good choices, including saving money for short-term and long-term goals, donating money to charity and even investing it.
It is also important to set rules about what children will be required to buy with their allowance. How much will they have to contribute toward sports teams and other extra-curricular activities? Will they have to buy some of their own school clothes? If they don’t make a lunch and bring it school, will they have to buy their own food? These are all concerns that need to be worked out. Make sure that allowances are large enough to cover required expenses, plus a little bit that they can use for something extra.
Some parents even have a contract signed with their children, specifying how much their kids receive each month, and what they are expected to cover using money from an allowance. Susan Beacham, founder of Money Savvy Generation, uses this technique. She explains on MSNBC.com that an allowance with strings attached teaches financial responsibility and prepares children for what we lovingly refer to as the “real world."
“I’m trying to teach them the habit of choice,” Beacham said. “First of all, their allowance is for expense coverage. It’s not money just for breathing ... and I’ve told them, ‘Now you have to do what I do when I get paid. You have to put some money away, donate some money and invest some money for the future. You have to pay yourself first.’”
As your children grow up and get their own part-time, after-school jobs, you can cut back on the allowance, and adjust how expenses are paid out. Make it clear that, even though some of their allowance money can be used for fun things, the main purpose is to teach your kids how to budget and spend their money wisely so that they can be financially responsible adults.