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The Right Way to Give your Kid an Allowance

If you’re hoping to raise your children with a strong foundation in financial literacy, giving them a regular allowance—and letting them figure out the best way to use it—is an important tool.

Parents who give their children an allowance are more likely to have children who say they are knowledgeable about managing personal finances, feel they are smart about money, and think their parents did a good job teaching them about finances, according to a 2015 study by T. Rowe Price.

“Allowance could be a key learning opportunity to empower and increase kids’ money-management confidence,” says Marty Allenbaugh, a certified financial planner with T. Rowe Price.

Allenbaugh says that in addition to talking about money with their parents, kids have to get some real experience with it. He likens talking about money without giving an allowance to telling a child how to play the piano without ever letting him sit at the keys.

It seems most parents agree—nearly 70 percent of parents give their children an allowance, according to the American Institute of Certified Public Accountants. Like any tool, however, you have to use an allowance properly for it to be effective.

Money Lessons

The following recommendations can go a long way towards make an allowance a great way to teach your son or daughter the value of money.

Start early. Once your child is old enough that she’s asking about money and has a basic understanding of math—or she’s asking you to buy her things that she doesn’t need—start her off with a small allowance. The amount will vary depending on your family budget and your child’s age, but many experts recommend giving a dollar amount equal to between ½ and your child’s full age. So an eight-year-old, for example, might get $4 to $8 per week.

Don’t tie it to basic chores. Like everyone else in the house, your child should be responsible for a few day-to-day tasks, like cleaning his room or clearing the table, without being compensated. However, you might agree to pay him additional cash if he takes on more work around the house.

Teach your kid about budgeting.
Now’s a great time for your child to learn what happens when she spends her entire allowance on Saturday and then needs more money on Sunday. Rather than giving her more cash, have a conversation about budgeting and let her experience what happens when you don’t have enough money for those things you’d like to do.

Nearly half of kids whose parents frequently talk to them about money feel smart about personal finance, according to T. Rowe Price. “If a kid is frequently broke, he’ll start to appreciate having some money when he’s got it,” says Jim Fay, author of Parenting with Love & Logic. “You want them to blow the money now and learn from it, while they still have a roof over their head.”

Encourage giving and saving.
You can also use an allowance to show your child that money is not only for spending right away. Encourage him to save some of his allowance for the future and even to give some to others. Let him choose a long-term savings goal and make a plan to work towards it. Some parents might offer a match for savings, just as an employer would for 401(k) contributions. If your kid accumulates a decent amount of money by saving, take him to a bank to open a savings account.

Work together to choose a charity that’s important to your child and let him make a donation or use some of his money to buy an item that the organization might need. An easy way to do this is to set up separate jars or envelopes labeled “spend,” “save,” and “give.”

Have a plan for other money. In addition to an allowance, many children may receive cash for birthdays or graduation from extended family members and friends. Older children might earn money from part-time jobs. “Talk to your child and his grandparents (or whoever is making the gifts) and decide early on how you’ll handle that additional money,” Allenbaugh says. “A portion may go to the child, and a portion might go to long-term savings.”

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