Kids & Money: With a little cash in her pocket, a kid can learn a lot about money

Mom, Can I Have a Raise?

Every week, the same item tops Lisa Granados’ “bills to pay” list — her ten-year-old son Christopher’s weekly allowance of five dollars. Once Mom hands it over, the money is Christopher’s. It usually goes toward packages of basketball cards or maybe a particular toy he’s had his eye on. “I don’t tell him to save it or what to spend it on. He makes his own decisions,” says Granados, who lives in Elizabeth, New Jersey, and has been giving her son a regular allowance for a couple of years.

Granados has the right idea. According to personal finance experts, the best way for a child to learn about money management is by giving him his own money and allowing him to make his own choices about how to spend it. Not only does having a “regular income” teach a child how to spend wisely and shop around for the most bang for his buck, but chances are he will have more appreciation for the things he pays for out of his own pocket.

Kids & Money: With a little cash in her pocket, a kid can learn a lot about money

Financial advisor David McCurrach estimates that about 60 percent of American parents give their kids some sort of allowance. Of the parents who don’t, many think their kids are too young to have expenses of their own. “What on Earth does she need money for?” asks one mother of a six-year-old.

When most children turn six, however, they’ve already been exposed to the fundamental rules of commerce. What first grader, for instance, doesn’t know that a quarter will buy more candy at the store than a penny will? For that reason, many experts believe that first grade is the perfect time to start giving allowance. Elizabeth Lewin, co-author of Simple Ways to Help Your Kids Become Dollar-Smart, says, “By the time they’re five or six, most kids have a concept of numbers and of counting.” With these skills, says Lewin, most children are developmentally ready to learn the basics of saving and spending.

Pay Scales

Once you decide your child is old enough to get an allowance, the next question is, how much? Obviously, the amount depends on what you feel is reasonable and what your family budget allows. One common guideline is that the dollar amount should match the child’s age, but some parents are not comfortable handing over, say, nine bucks to a nine-year-old every week.

Instead, both Leech and Lewin suggest that kids and parents sit down together and discuss exactly what a child’s allowance will be used for before deciding on an amount. “Families need to think about what’s important to them and what values they want to teach their children about money,” says Leech.

For example, Christopher Granados’ allowance is his to do with as he pleases, and his mother believes five dollars a week is more than enough. In some families, however, an allowance may have to cover other expenses, such as paying for lunch at school, donations at church, or savings. Older children may also be expected to buy birthday presents for friends or finance their own shopping trips to the mall. Parents should come up with an amount based on what the money will be used for. “Make sure a child’s allowance covers the expenses you’re making him responsible for,” says Lewin.

Workaday Blues

Christopher Granados works hard for his money. Every week, he is expected to clean his room, vacuum, and take out the garbage before mom hands over his allowance. “That’s the deal we have,” says his mother.
While many parents expect their children to help out around the house in exchange for an allowance, most experts, including Leech and Lewin, believe that allowance and chores should be completely separate issues. “An allowance should be given because each person has some money that comes as a result of being a member of the family,” say Leech. “Allowance should not be linked to chores. Everybody should have responsibility for doing things for the family, not because they’re being paid to do them.”

Lewin agrees: “A family is a community. I don’t get paid for emptying the dishwasher. Why should a child get paid for doing his share around the house?”

Likewise, allowance should not be used to “pay” for good grades and finished homework. Like chores around the house, children should strive to do well in school because it is their responsibility to do so, not to make a quick buck.

But Lewin notes that there is nothing wrong with giving a child an additional sum for doing extra work or tackling an usually large task, like cleaning the garage or mowing the lawn. One dad, whose son and daughter earn money beyond their allowance by helping him with projects around the house, calls his kids his “little subcontractors.”

The Price of Punishment

Contrary to what many parents believe, withholding allowance is not an effective way to punish a child. “The understanding is that that money is the child’s right for being a member of the family,” explains Leech. “It isn’t payment for good behavior, and it shouldn’t be used as a bribe to get a child to behave or as a punishment when he doesn’t.”
By taking away her allowance when she misbehaves, Lewin explains, parents are sending the child a negative message of what money is all about. “Just as you or I count on our paycheck, a child counts on her allowance,” she says. “Taking it away only leaves her in a bad position, especially if she has plans for her money.”

That is not to say, however, that there is anything wrong with making a child use his own money to repair or replace something he damaged. And if a child borrows money from a parent, he should be obligated to repay it. “Some parents even set up a system of fines for broken rules,” explains Leech. “A missed curfew, for instance, might mean the child has to contribute a dollar to a family fund that will eventually be used for a special family treat, like a dinner out.”

Money Management, K-12

Leech points out that many families prefer to give kids money on an as-needed basis. “It’s just easier,” she says. “But children have things they want to buy, and they don’t want to have to ask mom and dad every time they want or need something, especially older kids.”
For that reason, a child should receive his allowance on a regular schedule. “Allowance has to be paid at the same time every week,” Lewin says. “Think of it as a child’s salary.”

And difficult as it might be, parents should adopt a hands-off attitude when it comes to a child’s allowance. “Money is a major issue in many families. You want to raise kids who are independent and who aren’t afraid to make their own decisions. They need to make some mistakes in order to learn. But in the end, kids develop a real sense of accomplishment from handling their own finances.”

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