Kids - How to Handle Allowance

 

Teens are fascinating. For parents, they can be a constant source of frustration and joy, shame and pride. Sometimes it feels like they can't be taught anything. It's probably a pride thing. They don't want to admit that you might actually know something, after all.
So how do you teach a teen to manage money? You have to be clever and let the teen THINK that they're figuring this out on their own, when in reality they're following a carefully laid plan.

The Plan: Introduce an Allowance

Here's your new plan: Give your teenager a new allowance. Let's look at the details.
Teaching kids about money involves several steps.

1. Learn how to spend money
2. Learn how to earn money
3. Learn how to save money
4. Learn the value of money
5. Learn to manage an allowance

As easy as this looks on paper, the steps aren't necessarily consecutive in the real world. Toddlers, for example, might start at phase one and move pretty quickly to step 3 or 4, but their scope of understanding is going to be limited. Teens have the opportunity to much more money and are thinking about buying cars. They can manage allowances of $200 per month or more. Teens will face new challenges as their financial opportunities and responsibilities grow - an allowance is a VITAL part of that growth. It is a great teaching tool, that allows the teen to revisit these five core lessons over and over as both their allowance, and responsibility, grows.

Anticipate Allowance Mistakes

Kids learn about money only when they make mistakes with money.
An allowance has several purposes:

• To give your kid a chance to practice making decisions about money.
• To give your kid a chance to make financial mistakes. It has to happen. When it does, it's your job as parent, and first financial advisor, to be caring and loving, not to point out the "lesson learned." Your teen gets it. If you point it out, the lesson is lost.
• Finally, an allowance will make your life easier. If your teen is going to manage most of his financial decisions, you don't have to. It's one less thing to worry about.

Starting your teen on an allowance

To make an allowance work, you need to realize:

1. An allowance is a teaching tool.
2. An allowance should cost you zero dollars.
3. An allowance is YOUR money, not the child's money.
4. An allowance needs to come with accountability.
5. Your kid is going to mess this up.

Done right, a kid's allowance will cost you zero extra dollars.

To clarify, I am not talking about "free" money allowances. I am talking about an allowance that isn't tied to specific jobs, but instead is a type of salary for doing the work around the house that is expected and asked of them without argument. Along with that is being a reasonable human being that doesn't talk back and roll his or her eyes at the "boss." If you're currently giving your child an allowance that translate into "free" money with no strings attached, you are likely doing more harm than good. They're not learning any responsibility; just that Mom and Dad are sources of free money.

For the sake of this discussion, the definition of allowance I will use is: it is the amount of the family budget a kid is allowed to spend. It's money in your own budget that you have been spending on them anyway. This is an important point to realize for parents reluctant to begin giving their kids an allowance. It seems like it's going to be really expensive to be giving kids $20, $50 or $100 every month. But it's not. This is money you spend on them anyway.

Over the course of a year, think about how much you spend on clothes, shoes, sports activities, school supplies, and other necessities for your kids. For most families, this could easily be a thousand dollars, or two, or more per child. What if, instead of YOU spending this money, you gave your kid $150 each month, and let them manage it, one category at a time?

Allowances can be amazing tools for teaching kids to manage their money. Used properly, kids not only learn how to budget and fund their own expenses, but also will realize quickly that money never goes as far as they would like. That can open up a whole new conversation about earning money to supplement the money they are receiving from you.

If you're still on the fence about giving kids money to practice with, think of it this way. When we want kids to learn any other skill, we encourage them to practice. Why don't we do this with money? After all, if as parents we don't teach them THIS skill, we are leaving the teaching up to banks and creditors. I'd rather teach them myself, wouldn't you?

Bret Shroyer is the co-author of "Investing in Your 401k Kid: From Zero to Little Financial Genius in Five Easy Steps," a guidebook for teaching kids to be financially literate. He specializes in teaching parents to ensure their kids understand money and how to be responsible with it.