I promised to tackle the subject of allowance, so here goes. Allowance is an incredibly popular topic among parents. Along with its popularity there is also a lot of angst. Here is just one sample. “How should I start a first-grader on allowance?” asks one mother. “I don’t see what they need an allowance for — they don’t really spend money on anything and we don’t want to pay them for chores. My husband is keen to start our 7- and 8-year-olds on allowance and talks about dividing it into saving, donating, spending, but I think they’re too young.” This angst over allowance is justified. Children are too young for allowance before about age — especially when they have not yet learned what to do with money. Bottom line: If we start teaching our kids about money by starting with allowance, we have missed the first critical steps of money education that will eventually make allowance a successful financial lesson. Getting smart about money is a four-lesson process, with allowance at the end, not the beginning, of the line:

Teach children they have four choices for money: save, spend, donate and invest.

Help them set goals for each. Then let them practice dividing up money they receive as birthday or holiday gifts or the money they earn themselves. Help them divide up the money in a way that allows them to achieve their goals for saving, spending, donating and investing.

Use only coin and currency. Young children do not understand the complex concepts of debit cards and checks. Heck, many adults have trouble with it. But we all understand cash. Even kids know that when the coins and currency are gone, they’re gone. They can see it move out of their wallets and into someone else’s hand.

Introduce allowance. When this happens has less to do with the age of the child and more to do with their financial maturity. Children are only ready for an allowance after they have demonstrated the ability to manipulate all four money choices and have set and realized many goals for all four money choices. This will take a few years. Allowance really gets meaningful in about fifth or sixth grade.

Did you ever hear of an “allowance contract”? Well, I want to show you the integral part this can play in making allowance work for your child. Learn all about it in my next post.

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Susan Beacham
Written by Susan Beacham
Susan Beacham founded Money Savvy Generation in 1999 after almost two decades in private banking and investment management complemented by considerable time teaching at the elementary level.

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