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The Great Allowance Debate


More than a stipend, an important first step toward financial literacy.

The great allowance debate typically stakes out two basic positions: 1) An allowance should be pegged to household chores because it links money with work. 2) An allowance shouldn't be pegged to household chores because handling such tasks is part of being a member of the family.

This simmering brouhaha won't be solved here. You've got to follow your heart on this one. When you've sorted it out, there are some basic things you need to know about when to start giving your child an allowance, how much is reasonable and what restrictions should be placed on its use.

Remember: An allowance is intended to teach your child the value of money and how to manage it. You also want the kid to understand that your supply of greenbacks isn't limitless.

"Talk to your friends and the parents of your kid's friends to get a sense of what others do and how much other children are allowed to spend and what they're allowed to spend it on," says Linda Leitz, founder of Pinnacle Financial Concepts in Colorado Springs, Colo. and author of The Ultimate Parenting Map to Money Smart Kids. "But don't try to keep up with the big spenders."

Allow your child to make mistakes. Don't bail the kid out or you've undercut a basic point many adults don't grasp when managing their own money: You've got to live with your decisions. Do things right, and your child is off to a good start in gaining financial literacy. But if you get it wrong, your kid could be headed for money trouble as an adult.

Start by determining when your child should get an allowance and how much it should be.

Leitz suggests that children should receive $1 for each year of their age. A six-year-old would therefore receive $6 a week. If you have several children about the same age, it may be smart to give them the same amount in the interests of domestic tranquility. Nothing is carved in stone – don't give your child too much too soon. If you child isn't ready to learn about money, wait.

"If your child asks you what he can choose from when shopping or asks if he can spend money on lunch or some other item while out, he's probably ready to receive an allowance," Leitz says. "Some children as young as five or six can begin to appreciate having money they can use for themselves and not waste the opportunity."

Be sure to establish acceptable expenditures and make clear what's a prohibited use of the allowance. Leitz says acceptable use of an allowance might include toys, a treat once in a while at the school cafeteria or an occasional meal at the mall while shopping instead of waiting to eat at home. Unacceptable uses likely include music with profanity, t-shirts with foul or provocative words or images, and unsafe toys such as darts.

The key: Establish clear standards with bright lines defining the limits – and stick to it. Give examples to be sure your kid understands the rules. Encourage questions.

"If your child uses the money for something that's against your wishes, don't allow him to keep the purchase," Leitz says. "Your child just loses the money."

As your children mature, increase the allowance and responsibilities. The increased money can be earmarked for clothes and school supplies. Make it clear to your student that the extra money is intended for specific purposes – not weekend fun with friends. If your student makes a mistake and is caught short on basic clothes or school supplies, tough. If you bail the kid out, the lesson is lost. Your child won't learn to set spending priorities, undercutting the point of an allowance.

Think about requiring, or at least encouraging, your student to set aside money for savings and charitable giving, perhaps starting with the church collection plate. This can be tricky because the point of an allowance is to teach your child how to make independent decisions. The child may see enforced savings and required giving as limiting choice. One possible solution: Start early and try to make saving and giving just part of the financial landscape, as natural as school and homework.

Your child will make mistakes, but if you establish the ground rules and enforce them the goofs will be small.

You'll know you've done something right when your child tells you, in confidence, of course, that some friends buy dumb things and don't handle their money well.

"I want my daughter to know why there are lines at some stores and not at others," says Ryan Krueger, a Minyanville professor and a partner in Krueger & Catalano Capital Partners. "I want her to think about how to own the stores – not just the stuff on the shelves. If you try this, instead of teaching kids to wait and hope that something works out, they will learn about decision-making – and that might be the most valuable lesson of all."
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