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Personal Finance

401(k)ids - Part 1:
Give Your Child a Foundation for Managing Money

By Brenda Watson Newmann

Allowance Pointers
  • Pay it regularly and on time.
  • Choose an amount that will force your child to make choices.
  • Make a list of what the allowance is meant to cover.
  • Encourage your child to divide the allowance among savings, spending, and charity/church donations.
  • Don't tell your child what to spend it on.
  • Don't make allowance conditional on doing chores.

As you watch your youngsters squabble over who gets the last cookie, it may be difficult to imagine that they'll ever be old enough to hold down a job, let alone retire.

But face it, one day they will. Have you thought about how they'll manage their money? Experts say there's no time like the present to teach them good budgeting habits - even if they are as young as 3 years old.

In an effort to help prepare the next generation for managing their 401(k)s and other finances, the 401Kafé is featuring a series of articles on kids and money. This article looks at the value of giving a child an allowance, and strategies for deciding how much it should be.

The "A" Word - Allowance

What parent hasn't gone ballistic over Junior's constant whining for a new toy? "Can't I have this "Super-Duper Fragilistic Morph?…Won't you buy me Sweet Baby Punkin-head?" - it's enough to drive you bananas. Worse yet, if you give in you'll get about 5 minutes peace before the next object of desire is spotted on the store shelves. How do you stop this vicious spiral of consumer madness?

The answer, according to a number of experts, is allowance. Giving children a regular allowance is an integral part of teaching them how to manage money.

What's more, "there are a lot of side benefits to giving an adequate allowance," says David McCurrach, who cares so much about the topic that he created his own web site about kids and money. "It takes a lot of stress out of the child-parent relationship," because it turns the responsibility for managing the money over to the child.

What is an "adequate" allowance? And when should you start giving it?

The general consensus among financial and child-rearing experts is that you can start giving your children an allowance as soon as they understand that money can be exchanged for goods and services, which can be as early as age 3. So when your little darling starts grabbing for your purse whenever she sees a toy she wants, or tells you to go to the bank to "buy some money," it's probably time.

(But don't panic if little Johnny is already 10 and doesn't know a budget from a beach ball - just as it's never too late for an adult to start saving for retirement, neither is it ever too late to start helping your children learn how to manage money.)

How much allowance you give will depend on your circumstances and the child's age, and also, to a certain extent, how much their friends are getting (especially for older children and teenagers). Many parents give a dollar or 50 cents for each year of age, per week or per month, or a similar simple formula.

One formula McCurrach suggests is to calculate how much you already spend on extras for the child, and make that the allowance. "Johnny's going to get that money one way or another," he says, so you might as well give it to him without making him beg for it.

Many parents encourage their children to divide the allowance into amounts for spending, saving, and, perhaps, donations to charity or church. Be sure you give your child enough so that he can do this reasonably well. (You may tack on a bit extra - 10-15% for example - for the child to save.) It is important to write down and explain to the child exactly what the allowance is meant to cover.

Most experts also agree that you should not make the allowance conditional on doing regular chores like tidying bedrooms or taking out the trash. But you could consider paying extra for heavy-duty chores, as a way to help your child earn some extra pocket money.

For a lot of parents, the hard part is remembering to pay the allowance regularly. "Parents are very busy, and sometimes they just forget," says McCurrach. But if you want your child to learn to budget, you have to be disciplined. Just as you expect to receive your salary on a set day, your children will come to expect and plan for their allowance payday.

Help your child learn to make choices

Giving your child a reasonable allowance is a good way to help him or her learn to make choices.

Larry Beltramo, a Certified Financial Planner, says he and his wife give their 8-year-old daughter three dollars a week, purposely not enough to let her buy everything she wants.

"She has to think a bit before she spends it. She has to tell herself, 'If I don't buy this candy now, then next week I'll have enough to buy that hair barrette that I like.'"

This may also help children as they get older and encounter peers who seem to have limitless funds. If your children are used to living on a budget, they may be less influenced by someone whose lifestyle is so different.

How do you measure up?

What's The Goin' Rate? *
Child's Age
Avg Weekly

If you wonder how you stack up against other parents, McCurrach's site, "Kidsmoney" has a survey of average allowance for kids from 3 - 18, as well as a wealth of other information and surveys about allowance and budgeting for parents.

On a personal note, this writer checked to see how her kids are doing compared to their peers. They receive half their age in dollars per week - that's $4.50 for her daughter and $3.50 for her son. According to the survey, the average nine-year-old gets $5.01 a week, and the average seven-year-old gets $3.64. Close, but they may be asking for a raise soon...

McCurrach said he gives his 13-year-old daughter $20 a week, plus $300 twice a year for clothes. She's been managing an allowance since she was three, so he says she knows how to handle it.

* (Based on 3,000 responses from interested parents. Source: Kidsmoney web site)

Next week: Helping your child save…and spend wisely!

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.
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