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03/03/2008

A Lesson in Allowance

A common problem facing many parents today is how to prepare their kids for financial independence. Though this hurdle seems far off in childhood, it's never too early to start teaching your kids about money. We've come a long way from the days when, as far as finances are concerned, the more in the dark your kids are, the better. These days, it seems that the sooner you have the money talk, the better prepared for their own financial freedom they'll be.

Start With a Slow Approach

An easy way to start your kids out is with an allowance. This gives them a good, controlled environment to experiment with money. Just handing your kids the money, though, can lead to irresponsible spending that can start them out poor habits that could follow them throughout their lives.

Figure out what your kid's money will be for- what you will pay for while you are out and what he/she will. If their allowance money will cover only candy and toys (aside from special treats, of course) for the week, then explain to them that it is now their responsibility to save their money for these occasions. This way, you aren't giving your children "extra" money every week, but giving them the power to use the money that you would be spending on them anyway.

Essentially, you are giving your kids the freedom of choice. When you choose the parameters of the allowance, it might be a good idea to write them down so you and your child can refer to them later on as questions or disagreements will inevitably arise.

Planting the Seeds of Financial Planning

Help your kids plan ahead for more expensive items that they want. If they keep bugging you for a certain pair of jeans or the latest toy, this is a perfect opportunity to teach them about saving.

If they are old enough, you may even want to help them create a budget and have them figure out how much they would need to save each week for how many weeks to be able to afford their new toy. This lesson can start before you hand over any money to your kids. When your child wants a new toy, instead of just buying it for them, tell them that you will get it for them, but you need to save up for it. You can include them in the saving. Show them how you keep spare change to put in a jar for the toy. You can encourage them to help by suggesting that they sell some of their old, un-played-with toys to help the fund.

Diversified Funds

As your child gets older, you may want to create more than one allowance. A weekly allowance should continue, on time and consistent, for day-to-day expenses like going out for food with friends. Other allowances could be more infrequent, like every six months or even annually. These could be for things like clothing or gas money. Explain to your child that you are no longer going to give them money for clothes each time they ask, but that they now have a fixed annual amount to spend when and where they choose. If they blow it all in the fall, they will be left wearing last year's fashions all year long.

These are just a few ideas about how to help your children learn about money. Every family is different and oftentimes the "right" way to teach children about money occurs through trial and error. The important thing to remember is to talk to your kids about money before they start asking for it.





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