If you give a child an allowance ...

Ten tips for teaching kids how money makes the world go round.

By Brad Munson

Piggy banking 101

Piggy banking 101

In this age of instant credit, micro-money, and “buy now with a single click,” even the idea of an allowance may seem old-fashioned. Still, educators, counselors, and economists say that an allowance can be an important learning tool for children of almost any age, not to mention a great way to build a sense of trust and responsibility that benefits the entire family. If you’re thinking of offering one to your kids, here are some basic dos and don’ts to consider before you begin:

Have a Plan

Have a plan

Think through your stipend strategy before approaching your children. Why are you giving them an allowance? How much? How often? Is this simply a benefit of being a member of the family, or is there some quid pro quo, whether it’s academic performance or household duties (see “Do chores count?” for more on that)? And what expenses are your kids expected to cover with their cash — for example, video games but not fast food, DVDs but not school lunches, etc.? Have all the angles figured out before you sit down with your children, because they’re sure to ask every question you’ve anticipated (and probably a few more).

Money talks

Money talks

Once you've worked out the details, completely explain the plan to your kids: the rules, the whys, the what-ifs. You may even want to write them down, sign the paper together, and post it on the fridge, so everyone’s in agreement on how much they’re getting, when they’re getting it, and what it’s for. The clearer the deal at the outset, the greater the lesson — and the fewer hassles you’ll have downstream.

Teach common cents

Use it as a tool to teach common cents

All the experts agree: A weekly allowance is a great way to teach kids about the real value of money, how to be organized and responsible, and how to plan for the future. Grace W. Weinstein, a columnist for Investor's Business Daily and the author of Children and Money: A Guide for Parents, says an allowance is the “single best learning tool. Kids need to handle it themselves, making their own mistakes." So use your children’s to help them grow more independent and build important financial skills for adulthood. (It works less well as a motivator or disciplinary tool — see “Don’t deny their dues,” coming up.)

Saving, spending, sharing

The three S's: Spending, saving, sharing

Economists and teachers love this idea: When establishing an allowance, get your children to buy into the concept of spending only some of their cash while saving part for a larger purchase or purpose and sharing a bit as well — by donating to a local charity, their school or church, or another worthwhile cause. This is an excellent way to expose them to the three most important things they can do with their money, and it’s a lesson that can last a lifetime.

Do chores count?

The controversy continues after untold generations: Should you tie chores directly to an allowance? The experts are still split, but problems always crop up when — inevitably — kids don’t do the required work around the house. If you withhold payment, they’ll certainly learn one kind of lesson, but the larger concepts of saving, sharing, and planning for the future will be lost in the process. What’s more, some kids will use the “chores for cash” arrangement to bargain with you.

“If a child does not need their allowance that week," says financial advisor David McCurrach of Kids' Money, "is it acceptable not to do the chores? Do you want your children to ask ‘How much?’ every time you ask them to do something around the house?” Many experts say it’s more beneficial (and far less complicated) to consider the allowance as a benefit of being part of the family, while handling work and behavior issues separately.

Don't deny their dues

One thing almost every expert agrees on: No matter how tempting, don’t withhold allowance as punishment for bad behavior or poor grades. The whole monetary arrangement is supposed to develop greater trust and better communication and cooperation, so using it as an unexpected disciplinary tool will just make you look cruel and arbitrary in the eyes of your children (no matter how much they might seem to deserve it). Find another way to make your point while living up to the original bargain.

Show them the money

It’s tough to remember and easy to shrug off, but don’t flake on your kids’ allowance. One of the most powerful learning aspects comes from consistency: the regular, expected arrival of funds, on time and every week. Make it a priority to pay your children the proper amount as agreed to, which builds trust, reduces “bargaining,” and encourages planning for the future. It helps to choose a specific time during that first all-important sit-down — every Saturday morning, every Wednesday after soccer practice, whenever. And hand over the cash without whining or being reminded. It will pay off in more ways than one.

How young is too young?

How young is too young?

Some child psychologists and educators say that children as young as 3 or 4 can benefit from a (very simple, very understandable) weekly allowance. Others say to hold off until they’re at least 8 or 9. It depends on the individual child’s personality. Liberty Financial Young Investor Parent's Guide cites studies that have shown children as young as 3 are “ready and eager to learn about money and how things are bought and sold. By the time they're 5, many already have started to save.” Basically, once your kids have expressed interest in what money is, how it works, and what really cool things can be done with a ton of it, they are ready.

Say no to credit

Say no to credit

Between iTunes, Amazon, and everything in between, it’s a great temptation to allow kids (especially older ones) access to a credit or debit card, if only for the occasional, approved online transaction. Financial advisors are almost unanimous in their advice: No. Sure, it’s a little more time-consuming to insist that your children come to you for every online expense, no matter how small, but it’s far better for you to control the electronic purse strings at all times. You don’t want your young ones getting used to the idea that it’s easy to spend plastic money on the Intertubes. And make them reimburse you in cash, right then and there, out of their allowance. No credit from a card — or you.

Next stop: Checkbooks

Next stop: Checkbooks!

A weekly allowance can be a fiscal stepping stone too. Once your children are in high school, or even middle school, it’s easy to get them a bank account with you as the custodian, and then the next level of enlightenment begins. Concepts like investing, earning interest, and balancing a checkbook and budget start to become real at this point. Your kids will be far more likely to learn and understand those ideas easily if they’ve been living with the lessons of an allowance all along.

Looking for more tips?

Here are some other online resources that can help:

FamilyEducation's articles on allowances
Financial Planning Association's "Need to Teach Young Kids about Money? Try These Ideas"
Kids’ Money
Kiplinger’s “Money Smart Kids” columns

Brad Munson is a freelancer writer, father, and sex educator based in Pasadena, Calif.