How To Teach Children About Money

A previous column on the subject of teaching children about money generated some interesting feedback. One person inquired, "Does it work for your children?" Fair question. The answer is, "Yes it does." This column is a continuation of teaching children about money.

The previous column ended with ideas for 10 to 12-year-olds, such as paying them for small jobs like waxing the car or washing windows. This column picks up with a child’s allow-ance. An allowance is a great way for a child to manage—or mismanage—his or her own money. Encourage your child to view their allowance as their portion of your family’s income. This is an empowering idea that boosts their self-esteem and sense of belonging.

How much allowance you decide to give your child will depend on their age, your family’s financial situation, and the amount your child’s friends are receiving (one has to learn to keep up with the Joneses early in life). Here are some ideas to keep in mind when you are deciding when to start, how much to give, and on what terms.

Have a written agreement. Write an informal "contract" which you both sign that details the amount of money you’ll give your child, how often, and on what terms. Having a written document will help your child learn that a signed paper usually backs up a financial commitment.

An agreement in writing also signals to your child that you are taking them seriously and welcoming them into the financial life of the family. Be sure to pay the allowance on time be-cause children need structure. This is a good way to demonstrate to your child that you honor your financial commitments and expect them to do the same. Be sure to clarify the terms. Allowances can be given conditionally or if a child completes their chores or schoolwork unconditionally (automatically) each week.

Use an allowance as a carrot and not as a stick. Never withhold allow-ance as a way of disciplining your child. It might be better to discipline them with "time outs" or loss of privileges, even for a child’s failure to uphold their end of a chores-for-al-lowance agreement. Experts recommend that a child get their allowance every week, no matter what; it allows them to learn to budget their money and to plan savings.

It’s a good idea to provide enough allowance so that your child can pay for something—a video game or a toy—without having to save for weeks. Later on you may want to include enough to cover lunches, school supplies, or clothing.

As your child gets older, increase their allowance. You might choose their birthday or the beginning of a new school year as a time to discuss their needs, to assign them additional re-sponsibilities around the house, and to increase the amount of their allowance accordingly.

The next step in educating your child about money involves creating a personal budget. This is a powerful way for a child to show himself that he has control over his spending and has real choices to make regarding money. By creating a budget together, you can help your child save for that skateboard or special pair of running shoes he wants. Your child’s budget will vary depending on his age, the amount of his allowance, and what he needs and wants his budget to cover.

Here are some guidelines to consider. Decide what the budget covers. It should include anything the child is saving to buy, the amount to be spent or saved for each item, and a space for the child to record how much he actually spent or saved during the week. A young child will need help adding up the weekly totals. An older child can manage a monthly budget, which might include bank account savings for specific purchases, such as a used car or major expenses like college tuition.

Make sure the budget is focused and realistic. There’s no point in making a budget if the items on it and the amounts allocated are not specific and appropriate. Spend some time researching how much things actually cost, and revise the budget periodically to add necessary items and adjust spending and savings goals.