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Allowance can be tool for teaching children how to manage money

August 03, 2007|By LYNN LITTLE

Parents who dole out cash to their kids every time they're asked might find themselves doing so for a long, long time. Consider using an allowance to teach kids how to manage money. The allowance can help kids develop the skills to become financially savvy and independent of parents.

If you believe you can't afford to give family members allowances, try tracking family spending for a few weeks or even a month or two. You might find that doling out money here and there exceeds the total dollars that could be used for allowances for family members.

Evaluate the family spending, looking for spending patterns that could provide opportunities to trim cash flow and reallocate funds for an allowance for each member of the family - children and adults.

Consider a child's age, maturity level, and activities that require financial support, such as renting a band instrument or saving for a tennis racquet, to estimate an appropriate allowance. Include your child in the process to reach agreement about the allowance and the expenses it should cover.

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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.

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