As I said before, I feel an allowance is about independence. So as a parent, you need to let your kids make their own spending decisions as well as their own mistakes. Think of it as their first lesson in budgeting. If their allowance is supposed to cover school lunches for the week, snacks and extras like CDs or a movie, but they blow it all at once, don't come to the rescue with extra cash. Let them figure out how to cope by packing a lunch or giving up the snacks.
As your kids become older, you can encourage even better budgeting and money management skills by increasing the time between allowances. You can even add to the expenses you expect them to handle. For instance, give your teen a monthly allowance that's meant to cover some essentials like transportation or clothing, or discretionary expenses like entertainment - he or she will learn more quickly how to make the money stretch. The trick, and it can be a hard one for parents, is to let kids handle it themselves and don't always be there to fill in the gaps.
INTRODUCING SAVING AND GIVING
While teaching kids to budget is important, instructing them to save and to give are right up there at the top of my list. With an allowance, you have a great opportunity to introduce both of these concepts and help your kids develop positive lifelong attitudes toward saving and philanthropy.
Even the youngest kids can learn to divide their allowance into three jars: one for spending, one for saving and one for giving. With older kids, encourage them to set aside at least 10 percent of their allowance, gifts and any other income. Once they start to accumulate some savings, take a trip to your local bank and open a savings account.
When it comes to giving, you can help your kids earmark some of their savings for a particular charity or cause they can identify with, such as a local animal shelter or an organization that provides help to less-advantaged children. As you get your kids involved, I think you'll find the experience rewarding as well.
AVOIDING THE PITFALLS
There are a couple of other ideas I want to discuss in order to help parents avoid some common mistakes. The first has to do with associating chores with your child's allowance. While it may seem wise to have kids earn a portion of their allowance, it can sometimes backfire. For example, what if your daughter decides she doesn't need the money this week? Does she still have to do the chores? It might be best to make these responsibilities part of their contribution to the family and attach the allowance only when handling expenses.
Finally, once you establish an allowance, be consistent. Your part of the bargain is to make sure your kids receive their allowance on time and continue to get it.
It's only by having money, and the responsibilities that go with it, on a regular basis that kids really learn to value and manage it wisely. If these lessons are learned early, you won't have to worry when your son or daughter takes the first major steps toward financial independence. You'll already have put them on the road to success.