Here's an example: Start with three spending categories of interest to the child. Then, write up a simple contract to remind each other of your financial agreement. Show the child how to keep a register of income and expenses, and meet regularly to review the register and talk about spending choices. Adjust as needed, adding more categories as the child grows in his or her ability to manage money and achieve spending and savings goals.
Decide when and how an allowance will be paid, and then pay it regularly. Do not withhold an allowance as punishment.
Encourage a "save some, spend some and share some" attitude. Talk with a child about saving 10 percent or more - depending on their short-term (paying half or more of camp expenses) and long-term (saving for college or buying a car) goals - everyday spending, and setting aside another 10 percent or so to help others.
Resist the temptation to bail children out if they fall short of their goals or run out of cash, and refer back to your agreement. Knowing when and how much to save and spend is a key lesson in money management.
Model responsible financial management. Ask a child to tag along on a trip to the bank or other financial service provider, and then share with them why you are depositing into one or more accounts, such as saving for home remodeling, vacation and/or retirement savings.
Model keeping track of credit or debit card purchases in an expense register (like a check register). Or, set aside cash so children can see their parents' spending money, rather than always using a credit card.
It is also important to try not to be critical of a child's spending choices. An allowance is discretionary money but also is a learning tool. Making spending mistakes typically helps to build decision-making skills. Discretionary money offers freedom, including the freedom to make spending mistakes.
Given an allowance, a child might rush to buy an overpriced but trendy toy that falls short of expectations. The spending mistake can bring disappointment, but will likely be less of a disappointment at age 10 or 12 than decades later, when a purchase might be significantly more expensive.
Ideally, the goal is that by the time a child reaches upper-level high school, he or she should be handling 100 percent of his or her own money.
Lynn Little is a family and consumer sciences educator with University of Maryland Cooperative Extension in Washington County.
