By: Mary E. McCraw, CFP®

Teaching basic financial concepts early can minimize common but costly financial mistakes kids often make when they leave home. Mistakes happen, but a mistake with a $200 clothing allowance is not nearly as devastating as racking up credit card debt down the road. There are many ways to teach young children about money, but a great tool for hands-on experience is an allowance. Here are some items to consider:

• Age – Generally it is best to wait until the child can count money and has some basic math skills. First grade (ages 6 to 7) is a good time to start. 
• Amount – There are a couple of different ways to determine this. You can follow a rule of thumb, such as an amount based on age (ex. $1/week for each year of age). Another approach is to determine how much you currently spend on items to be covered by the allowance (discussed further below) and use that amount. Be sure to account for savings and giving (if desired) in the amount. 
• Responsibilities – For younger kids, their money can cover toys and games outside of birthday and Christmas. Start with these discretionary expenses and add in more responsibility (clothes, lunches, etc.) as they get older. 
• Savings – An allowance can be used to teach and reward savings habits. Have your child set aside a portion each week for saving. As they save, you can open a savings account and even consider a “matching” program to promote savings. A “very own” bank account can prove to be a huge savings incentive.
• Giving – If you are charitably inclined, an allowance can be used to pass that value on to your child. Factor this in when determining an amount to give and encourage a set amount from each payment. Talk to your child about various charities, focusing on organizations and causes they can relate to, such as a local church or a charity serving children.

From a practical standpoint, cash is the best way to manage an allowance for young children. They benefit from the tangible money they can count and divide into jars/piggy banks. As they get older and are ready to manage “virtual” money, there are several online banks and other applications set-up for just that purpose. The goal is to continuously educate your kids so that they become responsible adults. It will give them a greater sense of control over their lives and prevent financial pitfalls that affect so many adults.

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