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Family Finances: Allowances - an Effective Tool to Teach Children about Money Management

Provided by the International Finance Corporation

An allowance can be used as a tool to teach children about money management.  Although there are many philosophies about the right way to handle allowances, many experts subscribe to the following method.

An allowance should be given at the same time every week, with no strings attached to behavior, chores or grades.  The amount should be individually budgeted and should include enough so that the child (after “spending” money) can put aside a set amount every week for saving toward a short- or long-term goal, and a second portion for “sharing,” or charity.  Periodically, parents should help the child empty the money from their at-home container and deposit it into a formal savings account that pays interest.  Most importantly, parents are not to criticize what their children chose to do with their money, even if they spent it foolishly.

Of course, the way in which a parent chooses to introduce children to money is a highly personal matter.  However there are some basic ground rules that are worth noting.  Here are some ideas to help you form your own “family financial curriculum.”

  • Provide a regular allowance that meets your child or children’s needs.  Review and adjust the stipend periodically.  Resist the temptation to loan additional money (if you do —charge them interest), and never borrow from your children.
  • Pay the allowance on the same day each week.  Do not use it as a means to bribe good behavior out of your children.  And don’t link it to responsibilities you expect them to do just because they are a member of the family, like cleaning up after meals or keeping their room neat.  Otherwise, you may find yourself in a predicament if they decide to deliberately evade their duties.  It is OK, however, to offer to pay for work outside their daily duties, such as gardening or grocery shopping.
  • Help your children put away an agreed-upon amount for saving toward a specific goal and a separate amount for charity.  Keep these monies in separate envelopes or containers.  Set goals for both saving and sharing.
  • Open a savings account with your child at a bank.  Consider adding a “family supplement” to the interest rate paid by the bank at the time the deposit is made.
  • Keep the lines of communications open to discussing money with your children.  Ask if they are happy with the way they spent their money in the previous week and if they are going to do anything differently in the week ahead, rather than lecture them on proper spending habits.
  • Above all, lead by example.  Your children will learn more about healthy financial habits if you demonstrate by saving, spending and sharing your money responsibly.  Having organized financial records and workable budgets, paying your bills on time, and being prudent about credit will teach them as much, if not more, about sound money management than any textbook ever could.

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