by Andrew Lendnal     Do you consider giving your children pocket money or an allowance essential? Is it bribery to ensure basic chores get done, or does it teach them budgeting, saving and basic money management skills? In truth, it’s probably a bit of both, and I don’t think either is a bad thing.

Children watch and learn all the time, so start as soon as you can to model these money skills. Let children handle money and use the language of money when talking to them about shopping, or even a trip to the cash machine. In these days of credit cards, eftpos and internet banking, children rarely see money going out. But it comes in via ATMs, and of course eftpos cash-out – they could easily think you go shopping and get paid to do it!

Using pocket money and allowances as a starting point, you can develop important life skills. Children need to know that money comes into the household either as payment for work or as a benefit (often both), and that it’s not a limitless supply. If their pocket money has limits, they can begin to learn to budget, save and think about how they want to spend the money.

They will also begin to learn that there are some jobs they are expected to do in the family for free, although there may well be others that offer financial reward. I have seen wide variations on the pocket money/allowance theme in terms of amounts, how it’s earned and what it’s spent on.

Children tend to get most of their money from their parents when and as it’s needed, and occasionally by doing odd jobs. Children can also obtain money in other ways for instance: handouts, gifts, rewards, paid work, chore-based earnings and many other ways.

Chore Charts – the ultimate reward mechanism. 

Chore-based earnings will be the most common way your children in their early years will start to earn money.  Chore Charts are probably the easiest way to organise and track chore-based earnings.  You can use a simple calendar to keep track of completed chores and their values.  Refer to the book Gold Start for some chore-chart tips and templates to help you get started.

Allowances

Allowances help children learn how to handle money.  Budgeting and allowances help them to avoid being victims of money and to be in control of their financial futures.

But how do I Calculate my child’s allowance?

Many parents teach their children through a weekly allowance.  The amount to give is almost certainly the first hurdle.  Some parents give their children a dollar for every year of their age, i.e. a five-year-old gets $5.  But do what you feel comfortable with and can afford.  A good way to calculate your child’s allowance, especially when you have more than one, is to take the child’s age and halve it.  For older children, it may be wise to agree to make adjustments for special cases, such as upcoming school trips.

Allowance Ground Rules

If you decide to give your child an allowance, here are some things to keep in mind:

• Stick to a regular schedule.
• Sit down and set goals together with your children.
• Picture their dreams!
• Children have different values.  Let them take the lead in identifying their goals.
• Create a budget
• Begin by designating a percentage of their allowance as free spending money.
• Have your children give a percentage to charity.
• Help your children keep track of transactions.
• It’s important for children to make mistakes and learn from them in order to set reasonable goals.
• Consider giving raises to reward your child for handling allowances well.
• You should renegotiate allowances each year.

Create an allowance contract!

Creating an allowance contract is the next step in the process.  Gold Start includes a copy of this type of allowance contract as well as a step-by-step guide on how to effectively use it.  Before you give your child the allowance, sit down together and work out a simple contract.  In the contract, you promise to give a set amount of allowance on a given day of the week.  In return, your child promises to save a determined percentage of the allowance, put savings in the bank at the end of the month and spend the savings on items related to the goals the child has set.

Healthy financial habits begin with the small success and failures that come out of managing an allowance.  Giving children the opportunity to experience the ups and downs of budgeting helps ensure a more stable future and financial independence.

This article has been adapted from a chapter on allowances written by Andrew Lendnal in his latest book Gold Start – Teaching your Child about Money.  Look out for the second part of this series on Teens and Money, coming soon!

About the author:

Andrew Lendnal is a financial author and educator. For several years he has been directly involved in helping children learn about money, has advised financial institutions on how best to encourage children to save, and has given seminars and workshops on the subject. His first book, Budget Wise, Dollar Rich (with Anton Nadilo) was published by Exisle in 2005, and he has since written two books for children. He is employed by the Grosvenor Financial Services Group (who provide products and services for the Camelot Group), where he is Head of Marketing and Head of the Grosvenor KiwiSaver scheme.  Visit www.goldstart.com.au

About the Book:

Gold Start is jam-packed full of excellent tips and advice on how to make your child's life (and your own!) much easier in the future. The book is interactive too: full of questionnaires and tables to work through in order to find out the best financial plan for your family...

Publisher link: Click here to find out more.  Click here to find out more about this and other YourKidsEd recommended books for parents!

Comment on this article! What have you found to be a good allowance policy? Follow the comment link below.

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