Determining the right allowance for your child

October 14, 2008 12:00:00 AM PDT
Kids and allowance. When, why and how much? With some answers is the author of "Expecting Money: The Essential Financial Plan for New and Growing Families," Eric Sandberg, also known as "The Money Mom."

Erica's advice:

An important part of parenting is instilling healthy financial values. Allowances can be a terrific teaching tool - when used correctly.

Before giving money... By the time children start Kindergarten, they should know the denominations of money - the difference between a nickel, dime, quarter, and bills and be aware of certain common costs: a box of cereal is $3.00, a scooter $50.

When
Six years old is a great age to begin giving children a small amount of money. At that age they understand numbers and have a grasp of basic mathematics (adding and subtracting).

Why
Nothing gets the point across faster and better than trial and error. It can also stem begging. Say, "Use your allowance! If you don't have enough, save for it." This gives children power and independence. It will also teach them to spend carefully and not squander their money on things that are not that important.

How
Consider allowance as "free" money; it is not a wage. However, if your child goes above and beyond it can make sense to give a little extra cash as a reward. For example, an allowance should not be tied to completing homework assignments or keeping their rooms tidy, as they are normal and expected tasks.

How much
A good figure to start a six-year old with is a few dollars per week. It's enough to buy a very small item such as a sticker book, but if they choose to save it, the amount will increase quickly and they can purchase something bigger and better. Increase the sum by a dollar or so each year.

Encourage savings
With a negative savings rate in the US (on average, Americans spend $1.25 out of every dollar they make), it is crucial we help our children learn how to save money. Consider:

  • Requiring savings - a dime out of ever dollar socked away starts a healthy ten percent savings habit.
  • Matching funds - add 25 cents to each dollar saved. Include a vesting period, where they can keep all you put in savings for a certain period of time.
  • Establish Rules: Before handing over the cash, set your ground rules. For example, you may not want your child to spend all or any of his money on candy. Children may also lose their weekly allowance if they've done something wrong. Whatever you do, though, make sure your children understand your rules and the consequences so they can comply!

About Erica Sandberg:
Erica Sandberg is a money and credit management expert who regularly appears on Businessweek-TV, Forbes Video Network, Fox Business News, and Bay Area networks. She writes and consults for such magazines and websites as Babytalk, Redbook, Bank Investment Consultant, SFKids.org, MSNMoney.com, and Smartmoney.com, and developed the "Prepping Your Finances for Baby" course for San Francisco's Day One parent education center. Prior to her current work, she spent over ten years at Consumer Credit Counseling Service where she advised individuals on financial matters, led educational seminars, and served as the agency's primary media spokesperson. Her book, Expecting Money: The Essential Financial Plan for New and Growing Families, received Publisher's Weekly starred review, and has been excerpted by MarketWatch, MSNEncarta, and Pregnancy and Newborn.

For more information, visit www.ericasandberg.com.


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