5 lessons an allowance can teach

April 02, 2012

By Lynnette Khalfani-Cox | Money Rates Columnist

The decision whether to grant your children an allowance -- and how much it should be -- is strictly personal. But if you do choose to give your kids money on a regular schedule, it's wise to structure the experience in a way that encourages them to learn from it.

Here are five key lessons an allowance can teach:

1. The value of hard work

According to a new survey from T. Rowe Price, nearly half of parents in the U.S. (48 percent) give their children allowances. Among those, the vast majority (86 percent) require their kids to earn it in some way -- by doing anything from tackling chores around the house to maintaining good grades.

But whether they have to walk the dog, take out the trash or clear the table, requiring kids to perform certain tasks sends the message that money is rightly earned through hard work.

Also, that hard work is more likely to make them appreciate the money they earn -- as opposed to money that is merely gifted to them.

2. How to negotiate

Allowance amounts can vary widely depending on the age of the child and the preferences of the parent. But if you're a parent who uses an allowance as a way to encourage hard work in your child, you can take the lesson one step further by regularly discussing how much your child thinks they should earn.

This approach opens the door, of course, for your offspring to hit you up for more money. And you probably won't always agree with their requests for additional cash to sweep the floors or clean up the bathroom.

But when your children pipe up about getting a larger allowance, it's shows they're learning about the value of their time and labor -- and how to persuade other people of its value too. These negotiating skills can be particularly useful later in life when it comes time to negotiate their salary.

3. How to make smart spending decisions

Since parents typically take care of their children's basic needs, kids are usually left to using their allowances for discretionary spending. And learning about the relative value of these types of purchases can heighten their awareness of money in general.

"Anytime the child or parent is spending money, it's a teachable moment," says Stuart Ritter, a certified financial planner and family finances expert with T. Rowe Price. "Good spending decisions start by setting a financial goal. What is the child's money going to be used for? Without a goal, it's very difficult for kids to make good decisions, because then it just becomes about what they want right now."

Ritter says parents can help children prioritize their "wants" by reminding them of their goals and explaining that spending money wisely is about understanding trade-offs.

For instance, Ritter suggests that a parent might say: "I know you want the baseball cards you see right now in the store, but what about the video game you've been saving your money for? Are the cards worth the video game?"

4. The importance of saving

Trevor Bolin, a self-made millionaire and author of "Take Charge and Change Your Life Today," says that an allowance is a practical way to help kids learn what happens when you pay yourself first.

"If your child receives a weekly allowance, he or she should immediately put 10-15 percent into a savings account that won't be touched," says Bolin. "Or set a milestone for when money from the account can be used, such as the child's 18th birthday."

By then, Bolin says, your children may be so accustomed to saving that they may not even tap the account then.

5. The power of altruism

When you give a child an allowance, it's also an opportunity to talk about the full range of financial choices they can make with their money. Sure, they can spend or save their allowance, but the money could also be donated to a worthy cause of their choice -- an option that can be tremendously instructive.

"In my upbringing, my parents taught me to be generous with our money," says Melissa Cappleman, a certified financial coach. "We can't act like we have an unlimited supply when we don't, but when we are in a position to give, we should give big. It's fun!"

Cappelman notes that learning about money isn't only about enriching oneself.

"It's time we start to change our nation's culture and ensure we raise our children with a full awareness of the power of money and how to use it to benefit ourselves and the people around us," Cappelman says.

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