How to Decide What to Do About Allowance
For parents, one of the big questions is what to do about allowance – when to give it, why and how much, just for starters. Getting it right is important because an allowance is usually where your child starts learning their first money lessons.
If you’re looking for a little guidance here’s a good place to begin.
Decide when to start
When is a good time to start doling out the cash? Much depends on your child’s maturity. “Under the age of seven or so you don’t need to give them allowance because they don’t understand enough about money,” suggests Dr. Susan Bartell, author, The Top 50 Questions Kids Ask.
Experts tend to vote for somewhere between ages 8-10.
Determine the purpose
There are all kinds of theories about what an allowance should and shouldn’t be. What’s the real point?
Simply put, “To teach them the five golden rules of meaningful money management, earning, giving, budgeting, saving and spending,” explains Bruce Bickel, senior vice president of PNC Wealth Management.
So you buy into the idea, next you’re probably wondering how much to give per week. Much depends on the family budget, what you can afford, as well as how the allowance will be spent, if it will cover items like clothes or merely pocket money will make a difference.
Otherwise, what’s commonly done is to give a dollar per age, or based on grade. For example, a 10 year old would get $10 a week, or a third grader would get $3 a week.
“Tying an allowance to an age or grade is understandable to a child and allows parents to give different amounts to children of different ages. It also allows for an increase in allowance when the next milestone is reached and can help avoid disagreements,” says M. Colleen Beckemeyer, a certified financial planner with AXA Advisors.
In the end, you decide what works best for you.
Tie to chores or not?
If you really want to get a debate going, ask whether a child’s allowance should be tied to chores or not.
“Allowances should not be tied to chores. This is the most common argument amongst professionals. Chores are an obligation of living in a family – a child should not be paid for them. They should be expected to do them. In addition, when you use them as leverage, you quickly run out of a punishment and end up in a bad spiral downward of negativity,” says Bartell.
On the other side of the fence is Jeannine Fox, author, Feeding Penny Pig, “A six year-old can be given an allowance of $3 each week and their responsibilities are to fold their clothes after they are washed and put them away and set the table. Some people believe that allowance should not be tied to chores. I disagree. If mom or dad does their work, they don’t get paid. A child should learn that money comes from working for it, not from a hand out.”
Establish ground rules
There are more philosophies about what’s generally a no-no or a must-do when it comes to allowance.
For example, Melissa Holden, educational programs manager at TD Bank says allowances should not be based on good behavior. “That’s not something that should be rewarded with money. There should be an understanding that allowances are only earned when certain criteria have been met. You have to be consistent and there must be direct consequences,” says Holden.
Do not threaten to withhold the allowance if grades aren’t satisfactory. “Find a different way to reward children and teens for behavior and grades. Its fine to give them a monetary reward for the good grades, but don’t say it is their allowance. Allowances should not be tied to punishment,” says Dr. Susan Kuczmarski, author, The Sacred Flight of the Teenager: A Parent’s Guide to Stepping back and Letting Go.
Be consistent with allowance payments so that the child can learn to plan and make money decisions, says Beckemeyer. “Connecting money to emotions is not healthy. If a child becomes uncomfortable with money he/she will less likely be a good money manager as an adult,” she adds.
To teach money management, a child should be encouraged or even required to save a portion of it. If parents are saving, this can be a lesson that’s passed along by example. The child may even be encouraged or required to set aside a portion for charity and given away around the holidays, or used to purchase canned food for a food drive at school. “The child should be allowed to spend the majority of it on items of his/her own choosing. For primary and middle school children, a condition should be that they may not spend their money on anything that is not pre-approved by mom and dad,” suggests Beckemeyer.
It may not be a bad idea to offer a “matching” program. For example, if a child sets aside $10 in a bank savings account or a very conservative mutual fund, the parent may consider matching dollar-for-dollar or 50 cents per dollar. “When the child sees the monthly statement showing that his contribution was ‘matched’ and perhaps has earned some interest as well, it’s powerful and very motivating. This can also help the child learn how to read financial statements,” says Beckemeyer.
You don’t want to exert too much control though over the money, “having an allowance can teach kids about how to spend money. Let them make small money mistakes at an early age,” says Lori O’Donnell, a blogger with the MyCareOne Community.
Then, there are those think an allowance is a bad idea. “Don’t, I repeat give your kids an allowance. This takes away the child’s incentive and responsibility for making their own money. Allowances are like having the U.S. government control the money we are allowed to spend, how would you feel?” asks Hunter William Bailey, author, Wealth Strategies: Investing for Your Retirement. “My son is 12. I develop many different plans for him to make money. I let him pick the mutual funds in my Roth IRA. If they go up in value, he gets 10 percent of the gain, minus a college tax,” he adds.
However you decide, keep this in mind, says Fox, “The goal should be to teach the child about the real world and do it in a fun way.”
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