Whether you know it or not, you are teaching your kids every day about the value of money by how you spend it, save it, invest it or waste it. Qualified or not, you are their money coach and they will learn by watching and listening to your every move.

If this concerns you, not to worry as all is not lost… yet. If you want to raise financially healthy kids it’s better to start late then never at all and an allowance is a great way to start. Among other things, it teaches your kids how to manage their ‘own’ money. Even though it should be up to them to decide how to spend the money, it’s a great opportunity for you to teach some practical skills. I suggest starting with 5 simple money principles: earning, spending, saving, borrowing & giving.

Earning:

An allowance is your child’s ‘pay-day’. Establish the amount based on their age and the family finances. Be consistent and pay on time. The purpose of an allowance is really to teach your kids firsthand about money management. Don’t tie it to chores. If you are a member of the family then you are responsible to share in the household chores. This is not something you or anyone else should get paid for. However, give your child the opportunity to be able to earn extra money for taking on additional chores or responsibilities. Also, don’t pay or reward for your kids getting good grades. That is a personal accomplishment and should not be tied to a financial benefit.

Spending:

Have a discussion with your child about what exactly they are expected to pay for using their allowance. This is the start of them learning to live within their means. Something many adults don’t even know how to do successfully. Teach your kids age appropriate budgeting. For example, you have $5 to last one week and you are responsible to pay for any treats when we go to the grocery store. As your child gets older, their allowance increases as does the expenditures they are expected to use it for.

Savings:

Just as financial gurus advise you to save 10% of your income, so should you advise your kids. Teach them to pay themselves first by encouraging them to take 10% of their allowance and put it towards savings. If your child earns $2 a week, then suggest they take .20cents and put it into their piggy bank. If they earn $10 a week, again suggest $2 go towards savings. I often recommend creating ‘savings jars’ and act as the Bank of Mom. Open a ‘real’ savings account for each child and when the jars get full have the kids take the money to the bank to deposit. There will be nothing more exciting and encouraging for them, then to see their own money grow. Remember, it’s not the amount their saving that matters as much as the lessons and habits they are learning.

Borrowing:

You may think this is one aspect of money management you don’t want your kids to learn too early, if at all, but your child needs to be taught from an early age that ‘borrowed’ money is not free money. So teach your kids ‘age appropriate’ lessons on borrowing. If your child wants $10 to buy something and they have already spent their allowance, you now have a perfect opportunity to teach some valuable money management lessons.

You have the option to take a hard line, no money, no purchase. You can teach your child how to start a savings plan to build enough money to make this purchase - delayed gratification. Or you can lend them the money from the Bank of Mom. I suggest creating an ‘IOU’ jar and have your child sign an IOU. You may want to add interest on the borrowed amount to teach an authentic lesson on how the real world works. When allowance day comes, be sure you take the agreed upon amount off the top as payment for the loan.  When your child realizes they have little cash flow and nothing going towards their savings, they may think twice about the next item they so desperately need.

Giving:

Last but definitely not least, teach your child the importance of giving back. Whatever charities or causes the family supports encourage your child to take a portion of their allowance and ‘give back’ If they happen to love animals, your child can buy a can of cat or dog food and take it to the local shelter. Or buy a toy for a child who is not so fortunate. There are also many non-monetary ways to give back; donate unused clothes or toys or volunteer your time, just to name a few. It’s not about what or how much, just that you are giving back.

It’s never too late to teach your kids about money. Just remember 3 key points, lead by example, start young and let them learn by doing. Although making mistakes is a part of life when it comes to money, it’s better to make them early while the ante is still small.

This entry was posted on Thursday, October 1st, 2009 at 9:37 pm and is filed under kids and money, teaching kids about money. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.