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Make your child learn from an allowance

Published On: May 16 2011 02:44:03 PM CDT   Updated On: Nov 05 2012 04:03:56 PM CST
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Children may only earn a few dollar bills or some coins each week, but their excitement when they have their own money to spend can be seen in the candy aisle or the toy store. The youngsters spend time picking up different sweets or toys, counting out the money in their pockets and asking Mom how much they'll have left over.

Financial experts consider an allowance one of the best ways to teach a child about money, because it is often the first time a child gets to make decisions about what to buy and what to do with money.

But when should an allowance begin?

"When the kids start getting interested in money and using money to buy things," said Dr. Jon Gallo, coauthor of "The Financially Intelligent Parent."

Gallo said this could start as early as 5 years old.

However, many children might not be ready to handle money until they're a little older, according to Susan Beacham, cofounder and CEO of Money Savvy
Generation, a website that hopes help kids get smart abount finances. Beacham said 8 years old is a good age for an allowance to begin.

"Children are too young for an allowance before age 8 because they have not yet learned what to do with money," Beacham said.

Jayne Pearl, author of "Kids and Money: Giving Them the Savvy to Succeed Financially," stressed that the age at which an allowance begins should depend on the child.

"If they seem uninterested, it may be best to wait until they seem motivated to have some money of their own," Pearl said.

For example, when a child starts nagging for candy at the grocery store, parents can explain that they will give the child a little money each week, such as 50 cents, that the child can either spend or save, but the parents will no longer buy sweets, Pearl said.

Beacham said children are only ready for an allowance after they have demonstrated the ability to set and achieve goals for all four money choices, which are save, spend, donate and invest.

Cash Only
Parents should use only coin and currency for an allowance, Beacham said.

"Many young children do not understand the concepts of gift cards and checks, but they can see that when coins and currency are gone, they're gone," Beacham

By giving your children cash, they can begin to learn how to manage their own money, according to Jeff Harris, cofounder of The Family Legacy Forum, which teaches
financial success and education to families.

"If you put it in a savings account for them, they will not be able to learn from their mistakes. This is one of the most powerful benefits of an allowance --
it allows children to learn by doing," he said.

No Control
Several financial experts said an allowance should not be used to attempt to control behavior or manipulate a child.

"They receive their allowance because they are a family member, not because they are behaving well or getting good grades," Harris said.

Gallo said an allowance should increase as parents shift the responsibility for buying items to the child. For example, if parents are spending $4 a week on doll clothes for their 6-year-old daughter, the allowance could be $5 -- 50 cents for saving, 50 cents for charity and $4 that can be spent any way the daughter wants.

But the parents must be clear that they will not pay for doll clothes any more.

"Now your child has to think in terms of choices, alternatives and consequences. This is a major life skill you're giving your child," Gallo said.

Gallo's website,, has a free allowance tracker and an interactive tool for parents to decide which expenses they want to shift to children.

If a child gets a job, the allowance should continue because the youngster can still share in the family's resources, Gallo said.

"Why punish the child for getting a job?" Gallo said.

Pearl agreed, saying stopping an allowance may be a disincentive to work.

"But you can suggest that now that they are working, that they earmark more of their total earnings for saving and charitable giving. You can help them set goals that are loftier and very meaningful to them," Pearl said.

Parents can offer guidelines for how allowances should be managed and spent, but children must learn to make their own choices, Harris said.

Pearl suggested that parents choose a modest expense connected to the child's hobbies, such as guitar strings, and explain that the child will now pay for that item.

The child has to make the money last until the next allowance, and if he or she runs short, the parent should not bail the youngster out, Pearl said.

"They need to make mistakes while the stakes are pretty low so they can learn from them," Pearl said.