By the time your child finishes college, she likely will have racked up more than $5,000 of credit-card debt. By then, it's too late to give her a sound lesson in financial literacy. So it’s important to introduce the concept of money early. Letting kids manage an allowance teaches them to think in terms of choices, alternatives, and consequences.
- The Beginning: Age 5 or 6
Introduce allowance when you think your child is ready, which is usually around age 5 or 6. The age will differ for every child, so don't force the issue if he's clearly not ready.
- Working for More: Age 7 and up
Experts advise against tying allowance to household chores, behavior, or grades (as an award or punishment). Doing so makes it a disciplinary tool rather than a teaching tool. Similarly, your child should do regular chores and behave appropriately because she's a member of the family. She should work hard for her grades because she's motivated by a will to learn and succeed, not a few extra bucks. Finally, if her "income" fluctuates unpredictably, she can't budget effectively. That said, there is nothing wrong with kids earning extra money for extra tasks (beyond regular daily or weekly chores), just as they might when they are teens with summer jobs.
- Giving a Raise: Age 10 or 11
So how much allowance should you give? Levine recommends 50 cents to a dollar for every year of age, on a weekly basis. For example, a 10 year old would receive $5 to $10 per week. As your child grows, so should his responsibility for his own discretionary spending. Keep track of what you spend on him for a couple of weeks. Then choose one or two nonessential items that you will cease paying for, such as after-school snacks, comic books, baseball cards, or iTunes downloads.
Give your child enough to allow her to make her own choices — but don't bail her out if she gets buyer's remorse. Giving her extra money when she runs out only undermines your efforts and removes the incentive to learn to manage her money.
Be sure to discuss saving and budgeting in the same breath with spending, because you don't want your child to think you're giving her free money with no strings attached. Only about 40 percent of high school students surveyed recently by the JumpStart Coalition for Financial Literacy had a savings account. Your child needs to understand the bigger picture of money management, which is largely about saving.
- Helpful Tools: Age 13 and up
Given the level of technological maturity of most kids today, consider opening a prepaid debit card for your child that she can manage online. Deposit her allowance every week onto a special card created just for that purpose. Visa Buxx and the Allow Card, from MasterCard, both targeted to kids 13 and up, allow you to open a card in your child's name, and to load a preset amount of money onto the card. Your child can withdraw money from an ATM, make purchases online, and get up-to-the-minute balance information.
Look for teachable moments to talk about money. For example, the arrival of your monthly Visa bill is a perfect time to explain that credit can actually cost money, in the form of interest, if you don't pay your bill promptly.