Sunday, June 13, 2010

How Much Allowance Will You Give Your Kids?

It can be difficult to know how much of an allowance to give to your kids -- or whether to give them one at all. What should the structure of an allowance be based upon and how do you make it a valuable learning process for your children?

While you probably want to teach your kids to appreciate and value money, how to save and to spend, you may not want to overdo it with a large allowance, which can spoil them and do just the opposite. At the same time though, giving them more money, while increasing the number of items they much buy for themselves, can teach fiscal responsibility. This can make deciding upon an allowance amount a difficult balancing act, and one that will likely have to be tailored around your personal financial situation as well as the dynamics and relationships within your family.

Here are a few areas to consider when deciding how much of an allowance to give your kids.

Setting an Amount
Setting an allowance amount is often easier when a child is young. A quarter or 50 cents a week can seem like a great deal of money when they are just three or four. However, as a child grows and begins to realize just how much the things he or she wants to buy really cost, expectations of a regular and meaningful payout from mom and dad often increase as well. This is where things can get a little tricky.

As families differ widely in their incomes, expenses, savings, and spending habits, there may be a great disparity between allowance amounts as well and what amount you feel is sufficient for you child’s needs. Sure, you probably want your child or children to be able to splurge once in a while and buy something they’ve been wanting. But you likely also want them to learn the value of a dollar and realize that the things we often want in life must be saved for (even though many parents don’t seem to realize this).

Therefore, consider thinking of your child’s allowance as you would your weekly or bi-weekly paycheck. Your child will be paid for doing minor tasks around the house – things like taking out the trash, cleaning his or her room, feeding a pet, etc. If you decide upon a dollar a week as an allowance, you may want to grow this amount over time, as your paycheck would, to adjust for cost of living increases. Every year, consider having a review to judge performance, much like you may have at your workplace. Review how the child has performed assigned duties and base the allowance increase upon this performance.

As a child grows, so will his or her financial wants and needs. This can leave the standard allowance amount a bit lacking at times, needing to be supplemented by extra work or bonuses. Again, think back to your work, and how each year you may have duties added to or taken away from your particular job description as you and your work grow and evolve. Similarly, as a child grows and becomes more adapt at certain jobs, consider increasing payment for this work. You can still maintain a standard allowance amount each week, but you may choose to add duties for the child to accomplish, and therefore increase their set allowance amount. You may also decide to pay separately for things such as yard work, painting the house, washing the car, taking siblings to and from school or extracurricular activities, and so on.

You might also consider special bonuses for items that your child accomplishes without being asked or certain thresholds or achievements met by the child. However, these bonuses could take the form of a special family dinner, a trip to the movies, or other activity. Not everything must revolve around the attainment of money, otherwise you may risk your child growing up thinking he or she should only do things for cash rather than out of the kindness of his or her heart.

Making it a Learning Process
Receiving an allowance as a child can be a wonderful learning experience. But you can’t expect children to understand the process of receiving, saving, and spending money without guidance along the way. It is important to take time to explain why they are getting this money, how it could be used and for what, and what the consequences are of improper money management or lack of effort in their job duties.

Consider helping your child to open a savings account and as they age, possibly a checking account. If they are interesting in the stock market or other investments, your guidance could prove invaluable to them as they take early steps to financial independence. Being open and honest about money and finances (if you are knowledgeable yourself) can help a child immensely and may assist them in avoiding financial mistakes as they move into adulthood.

As a child, I had a friend whose father (a single parent) would give him $50 (what I thought was a huge amount of money) allowance every week. I was extremely jealous and thought my parents should do the same. However, this friend was to use the money for his food, clothing, and other necessities, as well as entertainment. I thought this was the coolest thing, because at age 9, he was already learning what things cost, how to spend and manage his money, and what would happen if he spent it too quickly.

Continuing the Growth Process
As a child grows into a teenager and eventually moves into adulthood, this doesn’t mean it’s time to let the learning process stop. Sure, we all have to learn and make mistakes on our own, but this doesn’t mean that parents should sit idly by and watch their children fail at personal finance. And while you might not want to get involved or step on any toes, there are ways to teach without necessarily ‘nagging’.

During their early adolescence and teen years consider letting your child sit with you as you pay bills, study investment performance, and review credit card or bank statements. While this process might seem boring to you, your child might find it extremely interesting and educational. I only wish I had known how much utilities cost, what a home mortgage ran, and that we actually had to pay taxes on our property when I was a teenager. I certainly would have set my income expectations a bit higher had that been the case.

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